Construction procurement: A summary of the basics

We briefly examine the fundamentals of construction documentation including:

  • Procurement – The Three Main Routes
  • Contract Structures
  • Collateral Warranties
  • A Word of Caution Regarding Collateral Warranties
  • The Content of Collateral Warranties

Procurement – The Three Main Routes

There are, in essence, three main procurement routes for construction:

  1. Design and build, where, as the name suggests, a contractor employs the design team and takes on responsibility for both design and construction elements;
  2. The Traditional Method whereby a developer employs the design team and a contractor takes on a purely construction role; and
  3. Management Contacting, where, as the name suggests, a developer employs a contractor to manage the construction role and a developer employs the design team.  A contractor in this case takes on no design or construction responsibility and liability is established by a network of third party agreements between a developer and a purchaser/funder/tenant with the Works Contractor's employer by a management contractor.

These three contract structures span the entire "Risk Profile" spectrum, from the Design and Build form where a contractor is totally responsible for the design and construction of a development, through to Management Contracting where design and construction risk is spread right across the board.

There are, of course, other procurement routes, for example Contractors Design Portion, but these are essentially variations on the above themes.

Collateral Warranties

Collateral Warranties are contracts granted by a Contractor, the construction team and, sometimes, the design sub-contractors to afford those with an interest in a development (usually a tenant, a purchaser or a funder) a contractual remedy in respect of defects which arise due to the negligence of any these parties.

This circumvents the personal nature of the building contract and appointments.

They are designed to provide the beneficiary with recourse against the party granting the warranty in terms similar to the recourse they would have had, had they been party to the original contract.

As their name suggests, such a warranty is collateral to, and runs along side, the "main" contract/appointment.  As such, the benefit of any agreement can only be judged by reference to the terms and conditions of the original contract.

In a Design and Build Contract, in principle, third parties should only need to look to a main contractor for a Collateral Warranty.  However, to safeguard against the main contractor becoming insolvent or being unable to meet any claim, the design team and design subcontractors appointed by a contractor are frequently expected also to grant collateral warranties.

In Management Contracting, collateral warranties will be required from all parties and in the case of the Works Contractor these will require to be granted to a developer as well to establish a contractual nexus between the parties.

A Word of Caution Regarding Collateral Warranties

It should be borne in mind that collateral warranties are only as good as the covenant of the party granting them.

If the granter has insufficient assets to meet claims or becomes insolvent, the collateral warranty will be of no worth.

Additionally the technical information contained in a building contract and the services detailed in the appointments should be reviewed by a qualified third party to ensure that the building to be designed and constructed matches that anticipated by the developer or a third party and that the services to be provided by each member of the professional team can be described as "full" such that there are no gaps in the areas of responsibility.

Finally, it should be borne in mind that a collateral warranty is not an insurance contract.  If a problem arises the defect must be shown to have arisen due to the negligence of the party against whom the claim is made.  This can involve litigation and may be a protracted process.  If more certain recourse is sought, Latent Defects (or Decennial) Insurance should be considered at the time a contractor is chosen.


Contentof Collateral Warranties

It is usual to expect the following principal areas to be addressed:-

Standard of Care 
A collateral warranty exists to provide a contractual remedy for a beneficiary when negligence has occurred.

There are many variants to the standard of care specified; breach of such standard amounting to negligence.

The most commonly found standard is that of reasonable skill and care.

However, in complex construction scenarios, the standard is frequently raised to that of a competent member of the relevant profession who has experience in developments of equal complexity to the development at hand i.e. a specialist has been employed.

Professional Indemnity Insurance

Each consultant ought to be obliged to carry professional indemnity insurance to a level commensurate with its levels of responsibility.  This should be checked to confirm the level is sufficient and confirmation obtained from the brokers that the relevant cover is in place and that the premiums have been paid up to date.

It is usually provided that the obligation to carry professional indemnity insurance at the specified level will endure only for so long as such insurance is available in the market at reasonable rates.

 When it is no longer so available, then to protect the value of the warranty, it is usual to provide that the level may be reduced to such level which is so available.

Given the obligation to carry insurance, Insurers require to approve the terms of the warranty to ensure that the warranty does not breach the terms of the policy carried (thereby rendering the policy void).

Unfortunately this has resulted in Insurers insisting on amendments to Collateral Warranties which weaken them but this must be weighed against the benefit of having a warranty which is insurance backed.

Licence to use Drawings

Copyright in plans and specifications, etc will remain with the author.  However it is expected that an irrevocable, royalty-free licence to use the same is granted for the purposes of repair and maintenance, etc.

The appropriate third parties should also be entitled to obtain copies from the professional team, usually in return for paying their reasonable costs.


To retain marketability a collateral warranty must be transferable to successors to the beneficiary’s interest.  Somewhat illogically, most PI insurers insist on a limitation in the number of assignations.

The market currently recognises that a warranty for a purchaser or a fund is assignable twice.  However, many insurers insist that a Tenant’s warranty is assignable only once.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.