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Two-stage tenders and McAlpine's PCSA lesson

Hollie Docherty

Preconstruction services agreement are vital to client-contractor relations – as a recent Sir Robert McAlpine judgement highlighted, explains Hollie Docherty.

We are seeing a shift in the market towards favouring two-stage tendering for large and more complex projects.

Two-stage tendering has potential benefits for employers and contractors if the process is managed well. The key to governing the relationship between the employer and the contractor during the second stage is the preconstruction services agreement (PCSA).

This tendering approach has two preconstruction stages. During stage one, the contractor will submit its initial tender to the employer and the parties will work towards entering into the PCSA at the end of stage one. Stage two is governed by the terms of the PCSA, with the aim that the contractor will submit its final tender and the parties will enter into a building contract at its conclusion. A well-drafted PCSA will provide the parties with a roadmap to the point where they can enter into the contract.

Advantages over single-stage

Using two-stage tendering can offer advantages, such as early contractor involvement with design development and value engineering, as well as programming and co-ordination of the supply chain.

This can allow the contractor to understand and manage these issues, rather than adding the premium associated with single-stage tendering where the contractor may not have the chance to influence or consider such issues with the client and design team before submitting its tender.

However, early contractor involvement usually involves upfront costs for the client and agreeing terms of a further construction document, the PCSA.

As mentioned, the PCSA governs the relationship between the client and the contractor during stage two of the two-stage tender, also known as the PCSA period.

The PCSA is usually limited to the contractor carrying out design services, but can sometimes extend to limited works such as demolition required before the main works commence. The contractor will work with the client and the design team to prepare its final tender, often by a specified date.

One criticism of two-stage tendering is the client is taken down a path of no return with a single contractor. There is the possibility of proceeding through the second stage with more than one contractor, but most clients do not want to incur the fees for doing so. So to ensure the second-stage tender is competitively priced and able to be objectively reviewed, the PCSA should set out specific requirements of the second-stage tender return pack.

Another key provision in the PCSA is how the PCSA period ends. The aim is usually to enter into a design-and-build contract, but the PCSA should also deal with how the contractor is to exit the project if the final tender is not accepted by the client or the terms of the building contract are not agreed.

Sir Robert McAlpine example

It is important the parties consider carefully what the contractor is obliged to do and be paid if the parties are unable to agree the building contract. This issue came before the courts in Almacantor (Centre Point) Ltd v Sir Robert McAlpine Ltd [1028] EWHC 232 (TCC).

In a fact-specific judgement, the court held the contractor was not entitled to further fees when the PCSA was terminated by agreement and the client appointed a third party to carry out the works.

Looking ahead, it appears two-stage tendering is going to be more common on large and complex projects.

Although the PCSA may be seen as yet another construction document to agree in addition to the building contract, its importance in governing the client-contractor relationship prior to entering into the contract or otherwise cannot be underestimated.

Hollie Docherty is a senior associate at Fladgate

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