Blogs

20 Mar 2018

Don’t get framed

by Mark Woodward-Smith, Group Managing Director -

Framework Agreements (FA) are used extensively in the procurement of construction projects and professional consultancy services. Such agreements apply for a fixed number of years and establish the terms governing contracts that may be awarded during that period.

FA have become popular as they provide a mechanism that can speed up the procurement process and reduce the high cost associated with tendering separately for several individual projects.

JCT, NEC and PPC all include framework forms, however clients may choose to utilise their own bespoke FA terms and conditions to contract with their supply chain.When invited to be part of a framework contractors should always proceed with caution given that…

  •  FA do not always provide the contractor with exclusivity to undertake all of the works to be executed under that FA.
  • There is often no obligation on the client to provide a minimum volume, or indeed any work under the FA, but the contractor will still need to recover the cost of maintaining a ‘core’ of personnel to manage the FA and bid for work. Frequently, these costs are not reimbursed directly and can only be recovered through securing orders for the tendered work.
  • Accordingly, the supply chain is faced with the dilemma of whether to gear up for the “anticipated” work, and commit the resultant increase in overheads and man power, in respect of forthcoming work that may never materialise, with little or no financial redress from the client.
  • There is unlikely to be a “terminate at will” clause in the FA, in favour of the supply chain, so the contractor may well be tied into the FA for its full duration
  • The FA is likely to be competitively tendered and therefore there is often limited scope to vary or dictate the terms offered by the client.
  • The contractor’s declared margin is usually ring fenced, possibly including sections of the preliminaries, and is usually a key determinant in securing a place on the FA. Scope to increase the margin during the lifetime of the FA is often minimal.
  • Most FA include schedules of rates that are adjusted annually against published indexation tables (such as BCIS or RPIx) however these may not be reflective of real market forces within the industry or a specific geographic locality, leading to the contractor facing a risk of under-recovering his actual increased costs. The effect of poor rates tendered at the outset will generally prevail throughout the entire term of the FA.
  • There is unlikely to be a clause that prevents a reduction in the rates in circumstances where there is a full in the published index used for their adjustment.
  •  Margins achieved on work secured through FA are often at levels significantly less than those achievable on work obtained through alternative routes.

Given the above, it is essential that a full and thorough review of the FA is undertaken prior to submitting a bid and we suggest that consideration is given to the following to ensure that you fully understand:-

  • The specific obligations and associated risks of each contracting party.
  • The specific terms and conditions that will apply to undertaking the actual work itself as the FA only governs the process/mechanism for the award of that future work.
  • The process to be utilised by the client to instruct and administer the works and ensure that you can dovetail into those systems.
  • The method of recovery of the cost of preparing and submitting tenders for the individual work packages to be let under the FA particularly where you are not awarded the contract for those works.
  • The mechanism in the FA to record changes/variations. Is it clearly laid out? If not, seek clarity and record the response in writing.
  • The requirements for maintaining contemporaneous records required for interim payments and also to establish a fair and reasonable evaluation of all variations.
  • The administrative burden associated with executing and raising invoices for a large quantity of relatively small value works.
  • The bespoke systems, practices and staffing levels that must be in place to accord with the timescales and process laid out in the FA in respect of both planned or reactive works.
  • The bespoke systems, practices and staffing levels that must be in place to accord with the timescales and process laid out in the FA in respect of both planned or reactive works.
  • The possibility of engaging with the client at pre-bid submission to clarify and resolve any scenarios that you consider the FA does not properly deal with.
  • The consequential impact on turnover and margin arising from varying volumes of work that may be secured under the FA.
  • Where the FA provides for a portion of the costs to be reimbursed on an open book basis, this does not necessarily mean cost plus.
  • Given the length of the relationship between the parties, effective ‘on-boarding’ at the outset of the contract is vital. Each party must rapidly develop a mutually productive relationship whilst recognising their respective obligations and duties under the contract.
  • The devil, as usual, is in the detail and once the FA is signed there may be little recourse to recover losses and or renegotiate terms.
  • As in any contract, it is vitally important to follow the protocol laid down in the FA and manage and resolve issues as soon as possible; issues in year one are highly likely to be forgotten by year 4. Good “real time” contract administration of the FA is essential.

Please get in touch with Mark on mws@systech-int.com if you have any questions relating to this article or you would like advice on framework agreements.

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