A relatively new instrument that provides greater control for the parties involved is the so-called two-phase agreement. As the name suggests, this type of agreement divides a construction project into two distinct phases. The first phase encompasses the design and tendering, while the second phase focuses on project execution, following finalisation of a mutually agreed price for delivery. This phased approach allows parties to fine-tune agreements and manage risks that only become evident as the project progresses.
In practice, several variations of the two-phase agreement exist. The choice of variant depends on factors such as the project’s size, scope and location, as well as considerations like the principal's possible exit strategy, the pricing method and how the responsibilities are divided between the two phases. Below, we discuss some primary variants of the two-phase agreements, offering guidance on when they are most appropriate. Additionally, we touch on alternative forms of cooperation and agreements that may better suit specific projects.
Variants of the two-phase agreement
Two-phase process with tender procedure
This variant of the two-phase process typically begins with a selection of candidate contractors during the tender notification phase. Following the submission of proposals, a preliminary agreement is awarded to the contractor chosen based on qualitative criteria. The selected contractor then collaborates with the principal on the design process, working within a defined budget to develop a sufficiently detailed design that enables the determination of a final price. This marks the conclusion of the first phase of this process variant.
Once the principal and contractor agree on price, the agreement becomes binding and the second phase - execution of the project - starts. The continuity provided by involving a single contractor from the outset can promote cooperation as both parties collaborate on critical decisions, such as determining necessary studies, interpreting data and planning next steps.
However, this approach carries certain risks for the contractor. The first phase is non-binding; meaning the contractor may invest time and resources without a guarantee of proceeding to the execution phase. If the agreement is not finalised, these initial investments may yield no return.
Two phases with two agreements
This variant of the two-phase agreement typically begins with a comprehensive tender procedure involving multiple participants. The agreement is definitively awarded to the successful bidder, however, a fixed price for the execution phase is not established at this stage. Instead, separate contracts are entered into for the design phase and execution phases.
During the design phase, the contractor and client work collaboratively to refine the project and a non-competitive price for the execution phase is determined upon its completion. If no agreement is reached on the price, the client retains the option to terminate the design-phase contract.
Unlike the standard two-phase process, this approach carries the risk that the contractor’s focus might remain narrowly on design deliverables, with the client acting more as an evaluator of design proposals rather than as a collaborative partner. This contrasts with the core intention of a two-phase agreement, which aims to foster broader cooperation between the parties throughout the project lifecycle.
Other construction agreements
Building team agreement
The preparation phase of a construction project often involves multiple parties, including the principal, architect, structural engineer and other consultants. When a contractor joins the design team, this is referred to as a construction team. The aim of the construction team is to jointly deliver a well-prepared project, with the contractor providing execution expertise early in the process to optimise the design.
By involving the contractor from the outset, potential execution risks can be identified during the design phase and mitigated before construction begins. To facilitate effective collaboration, it is prudent to formalise this arrangement through a construction team agreement with the contractor.
Upon completion of the final design, the contractor is typically granted exclusive rights to propose a (fixed) price for delivering the construction project. If no agreement is reached, the contractor may be left to absorb some or all of the costs incurred during the design phase. This scenario is far from desirable in the context of cost efficiency, underscoring the importance of mutual trust and clear, upfront agreements between the parties involved.
Integrated agreement
Principals may opt for an integrated design & construction agreement, in which the contractor assumes responsibility for both the design and execution of the project. A typical feature of this agreement is that the parties agree to a fixed price. However, at the point of agreeing on this price, there is often no certainty about the risks that might materialise during the execution phase.
Integrated projects are typically more complicated than standard construction projects. This added complexity means that contractors are likely to include higher allowances for potential risks within the fixed price, reflecting the uncertainties involved.
Conclusion
The suitability of any of the agreements discussed depends on several factors. If you would like further information or wish to discuss the most appropriate approach for your project, please do not hesitate to contact us. Our construction law team is ready to assist you.
