The human face of a complex construction contract--a mini-workshop/case study
Vinod Perera, State Manager,Victoria, Arrow International Australia Limited
My topic is on “The Human Face of a Complex Construction Contract.” It is a presentation based on team member reaction to a series of contracts that were involved in a real project in Auckland, New Zealand, the home of the America's Cup.
This presentation is in the form of a mini-workshop, thereby giving you the opportunity to comment on how you would have handled the complexities of the various contracts.
The project involved the setting up and construction of the corporate Head Office of one of the largest communication companies in New Zealand. The construction value was approximately $US20 million and was a six-story, two-block, curved building linked by a 26 meter high glass atrium with a total floor area of approximately 180,000 sq. ft.
Arrow International Ltd, which is a New Zealand-based Project and Construction Management Company, was introduced to the land owner (developer) and the communications company (tenant) by the land agent, with a short, sharp brief of “make the project happen.”
The land was located in the business district of Auckland's North Shore. It was a 12 ha block of land that belonged to the current owners for a period of over 80 years. It was family farming property handed over from generation to generation and the business district grew around the site. The family, in the past, had made some attempts to get various projects off the ground but with no success.
Our company took a fairly simplistic approach. We brought the parties to the negotiating table and said, “Come clean with what you want from this project.” A summary of their requirements was as follows:
The land owning family wanted:
1. Long-term ownership of any development.
2. Equity input to the project limited to land value.
3. To pay off all borrowings over the term of the lease.
4. To limit the collateral to the smallest area of land on which the building was to be constructed.
5. A zero or positive cash flow at all times during the lease.
For the communications company:
1. Initially a less than market rental.
2. Certainty over rental values over the life of the lease.
3. Recognize that this is the first tenant on a proposed office park and any initial advantage to be maintained during the entire term of the lease.
After a complex series of discussions and negotiations, an agreement was developed that satisfied all of the above requirements of the two most critical stakeholders. The agreement was based on an 18-year lease term, fixed rental growth and 75% funding by the family and the remainder by the tenant. This tenant funding was on components of the building that would depreciate to nothing over the term of the lease. Due to the complexity of the agreement and the unusual nature and the interdependence of the various stakeholders, the result was a complex array of contracts between the four key stakeholders that included the land owner, the tenant, the bank and the Project and Construction Manager.
The following is a summary of the six major contracts.
In summary, there were three contracts that the Construction Manager had to deal with on a day-to-day basis. One related to the base building construction and the other related to the essential fitout and the third relating to discretionary (loose) fitout. What was of interest is that the tenant and the landlord had an agreement to lease, which forced them to “look after their interest” in the best possible manner.
This resulted in a conflict of interest scenario for the Construction Manager. I would like to know from you how you would have handled the situation.
We at Arrow International handled it as shown in Exhibit 4.
The Human Face
What we saw was a fair amount of conflict between the base building team and the fitout team. They became exceptionally protective of “their client.” This was resolved by an internal but “neutral” Project Director who arbitrated among the various competing issues and interests. The basis of arbitration was not so much the contract, but the “intent” of the deal.
The primary reason for conflict was what component of work was in which contract package. The focus on this issue was mainly by the base building contract team who had a vested interest in keeping costs to a minimum due to a share of savings incentive. It is fair to say that the base building team was the least interested party to look at the “big picture.” There was a focus on the share of savings.
The fitout team, on the other hand, primarily focused on looking at options for the tenant with the aim of getting the best value for money leading technology solution. The cost plus margin contract allowed them to do this without any contract pressure. They were also confronted with an aggressive base building team looking for opportunities to pass on scope (and cost) to the fitout team. They resisted this effectively.
In conclusion and summary, the human face and behavior reflected the “contract” that each team represented. It was sometimes difficult for the parties to agree to work together for the common good of the project. When such difficulties were encountered they were resolved by a neutral internal arbitrator who resorted to the intent of the deal.
However, the final result from the process has been two truly satisfied clients who have each received a very fair deal. They both feel that their interests have been looked after by a highly focused team representing them. But the human face did represent the form of contract.
Both forms of contract had their pros and cons. But I would argue that a cost-plus margin contract allowed a focused Construction Manager to look for more innovative solutions, resulting in a high-tech building. On the other hand, the relatively low-tech base building was better handled through the competitive GMP contract.
The intent of the deal was used by the Project Director to successfully arbitrate when issues could not be resolved by the two teams. The fact that it was one company representing both parties resulted in all matters being resolved outside the courtroom.
The final outcome was a win-win and a win.
Proceedings of the Project Management Institute Annual Seminars & Symposium
September 7–16, 2000 • Houston, Texas, USA