If your contract looks fatter than a paperback novel, there’s a good chance it will be for some kind of construction project – there can be a lot to cover.

But before the details can be documented, there is a more fundamental decision to make: what particular kind of arrangement will this contract be recording?

Here we consider the two most widely-used contract models in the NZ building sector: Build-only and Design-build construction contracts.

What are they, and which one might work best for your project?

Build-only contracts are the most commonly used form of commercial construction contract in the NZ market, particularly for small to medium sized commercial projects. They go by a number of descriptions: the ‘conventional’ model, the ‘traditional’ model, the ‘client-led’ model. The crucial point is that in a Build-only contract, the owner remains in control of the project’s design. The owner will engage design consultants to design the project in detail. Then appoint a builder to construct that design. The builder will be responsible for workmanship, materials and works undertaken by suppliers and subcontractors (if any), but liability for the design will sit with the owner and their design consultants.

Design-build contracts are less frequently used in the commercial construction sector, but are often used in land and home packages. In the commercial sector, design-build is fairly regularly used for bespoke buildings such as schools or buildings with highly technical requirements. In a design-build arrangement, the owner provides details of specific requirements (these are usually technical performance requirements) for the project, and then hands control over to the builder. The builder will then design and construct the building in accordance with those requirements.

Note: The NZS suite of contracts include both build-only (i.e. NZS 3910:2013), and design-build (i.e. NZS 3916:2013) contracts. These are often used in commercial projects usually with ‘special conditions’ added to the base NZS conditions of contract. The NZS3910:2013 contract is currently undergoing a review and the draft is expected to be available for consultation from May 2023.

When should the build-only model be used?

Build-only contracts can be great for projects where the owner is keen to retain control over the development and outcome of the design for the building(s). The owner engages the designers directly and works with those designers to develop the design. The builder is then separately engaged  to construct according to the design.

Build-only is also a good choice when the owner has the budget and/or internal resource to manage and oversee the project, but it requires the owner to manage the risks of unforeseen costs and extended programmes.

A Build-only contract will usually be a better price, because the builder is not taking-on design responsibility (however, the design consultants will still need to be paid to perform that role).

When should the Design-build model be used?

Design-build can be useful where the owner knows their desired outcome, but doesn’t have the resources to work through the design and construct process. It can work well where if the owner is less worried about controlling the process, as long as they end up with a building that does what it needs to do. Remember, in design-build, the owner does not have control over the design (as in the build-only model). Instead, the owner specifies their required outcomes, and then the builder uses those to develop a design, and construct the building(s).

The fact that the builder assumes design responsibility usually makes design-build a higher price option than build-only contracts; however, this additional price should be compared with what it might cost for the owner to do that work themselves in a build-only contract — taking on separate design consultants, managing the interactions and gap-risks between those consultants and the builder, and so forth.

Design-build can be appealing to builders because it gives them more ability to manage key issues in a time-efficient and cost-effective way.

A word of warning however; if the owner has specified their requirements, but then has a change of mind and/or tries to get involved in the conception and execution of the design, they risk undermining the builder’s ability to achieve efficiencies in programming and/or design. This kind of ‘chopping and changing’ can eat into the builder’s margin and programme (and therefore, impact the viability of the contract).

When considering a design-build contract, it is crucial that the builder has the necessary resources to deliver the required outcome.

Comparing Build-only and Design-build

The key differences between these models can be classed into four categories: cost, time, risk profile and administration/general.

Cost

• You can expect design-build to cost more than build-only, because in a design-build project the builder will be taking on responsibility — and therefore the risk — for design as well as for construction. For builders, design-build can provide an opportunity to achieve higher returns than a build-only project. This is because design-build allows the builder to focus on achieving the lowest-cost design and construction (as long as your requirements are met). This is achieved by creating efficiencies in the design, programming and construction processes and by the builder retaining control of how they manage issues that arise.
• Build-only contracts tend to have greater budget increases than design-build contracts during the project lifecycle. This is because anything that changes the design from that which was included in the tender specification for a build-only contract, will result in a variation claim from the builder. In design-build, because the builder retains design responsibility and control over design progression, it cannot claim variations for design changes (except for those that might arise from the owner’s changed instructions).
• Build-only may allow the builder some (small) opportunity to try and reduce construction costs (and thus receive a higher return), but scope for this is limited by the requirement to construct in accordance with the design.
• Both models can provide price certainty at the award of the contract stage.

Time

• Design-build is likely to be more time-efficient than build-only.This is because the builder, in theory, has more control over how to manage delays, particularly those which impact the relationship between the design and construction phases.
• Build-only projects tend to have longer overall delivery times.This is typically because:
  • Design (ideally) needs to be fully developed before the builder is engaged. This is contrasted with design-build, where the builder controls both the design and construction phases, so they can efficiently minimise the segregation between these phases. The separation of the two phases in a build-only model can sometimes be reduced by overlapping the design and construction processes (to help reduce delivery time); however, this usually means builders are asked to tender on incomplete design which means there will be less certainty of cost and timing at the time of committing to build, thus increasing the risk to the owner; and
  • Variations to the design will automatically trigger extensions to a build-only programme. This is not usually the case on design-build, except if the owner requests design changes to be made.

Risk profile

• Build-only gives certainty about the building’s ultimate design, because design is already developed when the builder is appointed. Design-build, by contrast, provides less certainty about design because the builder will be designing the building(s) based on the requirements set out for them.
• Because the owner procures the design in a build-only project, this can mean they have more control over the ultimate quality of the building(s) than in a Design-build project. This can be mitigated by including relevant quality standards in the initial technical requirements to the builder.
• In build-only, the owner retains design risk (except for temporary works and construction methodology which are assumed by the builder). Some of this risk can be mitigated by obtaining warranties from the design consultants.
• In build-only, the builder does not have input into the design and/or planning of the project because they are appointed after the design stage.

Administration and general

• Design-build allows the owner to have a single point of contact (i.e. the builder) for the project. By contrast, administration of build-only contracts requires management of a number of design consultants as well as the builder; all under separate contracts. This can be challenging for the owner to manage, particularly on complex projects where there are likely to be multiple suppliers. The owner is unlikely to have that kind of headache under a design-build contract, because those responsibilities will fall to the builder.

Where is the market going?

Build-only is popular for small to medium-size projects and is the most commonly used model in New Zealand. NZS 3910 contracts are still widely used, albeit usually with many additional special conditions.

However, there is now a greater recognition in the market of the limitations of the build-only model: it can encourage a combative project culture driven by claims, which may not be in the best interests of the project. Because of this, we are seeing a desire to move towards contracting models where the commercial drivers for the owner and the builder are more aligned. The idea is that aligning the parties’ interests should help lead to better outcomes for clients in the long term.

There is increasing recognition that better outcomes for the project can be achieved by using other collaborative or relationship-based types of contracting (such as alliancing models which are more used in larger public sector projects) where the builder can provide input on how best to design or structure the build, and certain key risks are shared.

Carefully considering the contract model you use for your project can save you money, time and headaches.