AIR CONDITIONING CONTRACT OPTIONS FOR MEDIUM AND SMALL PROJECTS

Executive summary

An air conditioning contract is more complex than other building subcontracts, and accordingly a different contract type is often appropriate. The contract type should be chosen to minimise the risks that are most important for the project and client. For example If the project is medium sized, or complicated, or if the client is going to use the facility themselves and hence the quality of the facility is a criterion, a nominated subcontract is probably the best. For a smaller project a direct contract between the contractor and client could be considered. On a small speculative project where cost control is the only criterion, having the air conditioning as part of the builder's specification may be the appropriate solution. If there is any doubt a nominated subcontract should be chosen.

Background

An air conditioning contract has a number of differences (see APPENDIX A, below) from most other building subcontracts, and accordingly a different type of contract is often better. The type of contract used for an air conditioning project can significantly influence the cost and quality of a project. Furthermore the size and complexity of the system influence significantly the most appropriate contract. Many of the standard sets of contract documents are developed largely by people doing very large contracts and are not necessarily appropriate for smaller contracts. Any contract type involves risks, which to a certain extent can be traded off against each other, by appropriate choice of contract. In other words, it is critical that the contract type minimises the most important risks for the particular client and project. It is therefore also critical that the client be aware of the consequences and be involved in the decision making.

The main risks associated with a contract are:

• The risk that the system fails to deliver the expectations of the client in terms of comfort, running cost, reliability, life, aesthetics or ventilation quality.
• The risk that the project cost exceeds the minimum cost that could have been paid.
• The risk that the project is not completed on schedule.

Because every building is unique it is not possible to eliminate these risks, only minimise them. Strategies to minimise them include:

• Using a consulting engineer t design the system so that your interests are an integral part of the design.
• Choosing an appropriate contract type.
• Using a consulting engineer to supervise the installation.

Contract types

The three main types of contract used for small and medium projects are:

• The air conditioning specification as part of the builders specification. This means each builder who quotes the job asks a number of contractors to price the air conditioning component. As a very large number of contractors are asked for a price each contractor can only afford to spend a small amount of time preparing the quote. Furthermore the builder usually does not have an idea of the complexity of the air conditioning component of the project and hence of the appropriate contractors to contact. The end result is that often the contract goes to the contractor who made the biggest mistake and hence has to cut the most corners to make a profit. Furthermore once the builder has won the job, he often then tries to play the various contractors off against each other. If he succeeds in getting a further price cut, the contractor has to find even more corners to cut in order to make a profit. This has the advantage that a very low price can sometimes be obtained, but at a very significant cost in quality and functionality of the system. Another advantage is that the legal relationships between the parties are clear. (However this is illusory on a small project as legal redress is not usually financially viable.)
• The air conditioning contract is a nominated subcontract to the builder. This means a consultant issues a specification to an agreed number of contractors (usually three), reviews the quotes and recommends a contractor to the client, based on the client's best interests. This contractor is then nominated and the contractor and builder are instructed to enter into a contract for the specified work at the quoted price. This ensures that only contractors that the consultant knows are capable of doing the work are asked to quote. In addition someone capable of reviewing the tenders so any technical questions can be adequately addressed selects the contractor. (Refer APPENDIX B, below). This still maintains the correct legal relationship between the builder and contractor, while ensuring that the contractor has a strong incentive to ensure that the client is satisfied so that he can get repeat work for the consultant. Because a smaller number of contractors are asked to price the job, the contractors can afford to take more care in preparation of the quote, which ensures they are less likely to make a mistake that would encourage them to cut corners. This also gives them a better opportunity to ensure they don't overprice the job, which helps keep a lid on prices. This arrangement can be seen as a form of matrix management, which is generally considered appropriate when there, is a high technical content as well as cost and schedule considerations.
• A direct contract between the client and air conditioning contractor. In this arrangement the consultant issues a specification to an agreed number of contractors (usually three), reviews the quotes and recommends a contractor to the client, based on the client's best interests. The client then enters into a contract directly with this contractor. This has the same advantage that a nominated subcontract has, with the exception that there is a possibility of a conflict between the builder and contractor, as they have no legal relationship. For this to work, it is essential to ensure that the builders are prepared to work with the contractors and allow them onto site. A direct contract will usually eliminate the builder's markup on the air conditioning. This is a cost saving which can be offset against the risk of conflict between the builder and contractor.

Discussion

As discussed above the best contract needs to minimise the important risks to the client. So for example for a speculative building which is going to be sold immediately minimising cost may be the most important criterion, even at the expense of loss of quality. Accordingly designing a very simple air conditioning system and letting it through the builder might be the appropriate form of contract. However if the building is owned by the client and will be used by the client, loss of system performance and reliability are the most important risks. The risks associated with this might be minimised by either a direct contract if the project was very small or a nominated subcontract for a medium sized project. Because the nominated subcontract maintains the ideal legal relationship (the air conditioning contractor works for the builder), and also ensures the consultant has good control of the air conditioning contract, this contract type should be used whenever there is any doubt as to the appropriate type.

APPENDIX A: How is an air conditioning contract different from other building contracts.

An air conditioning contract is different from most other building contracts, in a number of important ways. One is that the air conditioning is normally the most complex single contract on a job. Another is that much of the technology involved happens on the building site, and not in a factory. For example a gas filled double glazed window might be high technology, but the installation of that window on site is the same as any other window. By comparison the way the ductwork is installed on site can make a dramatic difference to the noise and comfort level of the air conditioning. Much of the performance is dependent on things that you can't see. For example if you have specified a certain type of window it is quick and easy to verify that the contractor has supplied the window specified. A quick visual inspection will also determine that it is secure and that it has been correctly flashed. This level of supervision will not ensure that a fault is picked up in the air conditioning system. For example two pieces of ductwork installed may look the same, but one will generate noise and the other will be silent. Because an air conditioning system has to operate to function, it is not possible to test it until complete. By then it is too difficult to rectify all the problems as many of them have been built in. on a small or medium sized project the cost of legal redress will usually be greater than the value of the work and the client will end up having to accept a system that sort of works but doesn't work as intended. All of this means that the person choosing the contractor needs to be able to assess the skill level of the contractor relative to the complexity of the project.

APPENDIX B: How does the fact that the consultant chooses the contractor improve the quality of the system.

In a small contract it is not economically viable for the consultant to prepare a specification that details each individual nut and bolt. It is also completely impossible to rely on supervision of the contractor to ensure compliance with both every word in the contract and good engineering practice. The only way this could be done is to have the consultant on site full time, which would add another 10-20% to the overall project cost. - Clearly this is not viable.

This means that the only way to get compliance with the specification and with good engineering practice is to find a mechanism whereby the contractor has a strong incentive to comply. The only incentive that has any strong effect is the incentive of additional work from the consultant and or client. Where the builder lets the air-conditioning subcontract, the contractors may have loyalty to the builder, but his loyalty to the client or consultant is very tenuous. Furthermore small and medium sized builders don't have the technical expertise to assess an air conditioning quote and hence buy purely on price. For the contractor to get additional work with the client or consultant, the same builder has to get the job, with the same contractor. This is too tenuous, and the contractor knows the builder will choose on price so he cuts every corner he can, often ignoring the specification, particularly for hidden items.

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