Head Contractor Model: 26 May 2023

This post has been a long time coming as I have found it a challenge to think through the ‘how to explain’.

Motivated by comments that are on Nick Webb’s post, I am stating that I am not a supporter of the Head Contractor model where the HC model has no active directors or managing directors. My task here is to explain why and under what circumstances.

Please also note that I can provide evidence for what I say but as there are so many business sensitivities, I can notname or give specifics. This comment relates to where a Head Contractor is not the LBP responsible for the restricted building works.

Head Contractors (HCs) in my personal opinion (from my past five year experience) seem to be in the business of arbitrage.

This means that they are purchasing an asset (the contract to build your project) in a market where the price is higher and simultaneously selling in another market where the asset price is lower (the suppliers and subcontractors). Note: there may be levels of HCs such as one overseeing all of the Civil Works or the entire project.

To explain why I am saying this and why it matters. Very simply:

The HC has spotted that there is a business purchasing your job for a fixed amount of money (the most they can get from you which is how the market works). They may well be doing this using standard market build rates which will include their margin (these seem to be roomy). As the ‘Client’, maybe without your own Quantity Surveyor or experience, you will go to their fancy offices, see their fancy sales equipment, listen to the sales pitch and purchase the security of handing your build risk over. You will be told that the price you are paying is about right by your appointed QS as the outcome is around the understood market rate. There is nothing wrong with doing this but where it really fails is explained further down.

The HC may well be incentivised to maximise their share of the margin and some may do that at any cost. This is more likely to be where the key decision maker is not an owner, or where the directors pay little attention to what is happening.

Possibly the HC’s declared margin is between 6% and 12%. Their owners/directors could have incentivised the group with bonuses motivating them to increase their cash take. Here incomes their work:

• how to squeeze their suppliers and subcontractors to push their prices down once your project has started
• how to optimise the variations to get more money and margin from you. Often, the contracts and adherence to them allow this to happen.

The HC goes out to their network of subcontractors, they may be told they can’t work for anyone else (effectively a restraint of trade) or no future work may be provided, and the rate is squeezed down hard. This part is a bit of a mystery to me but I have heard the conversations and have had a few speak to me (one even emailed me inFebruary 2021 fairly desperate). Of course, there are others who work off rates and may not be so subject to the pressures.

For variations, especially with the classic Master Build contract, how many of you have been hit with price increases on a fixed price contract because you “changed the kitchen” or “materials increased in price?” You went back to your contractor with a ‘please explain’ and they say it is intellectual property they are not willing to give out? When you consult with an expert advisor, and go back to them with the wording of the contract, they reduce their charge to you and may even comply to an extent!

This all matters very much because the outcome can be a horrible working environment (high suicide rate) and poor workmanship.

The environment is aggressive and adversarial, the strongest and smartest will win (as per market/Darwinian forces). Potentially, you as the Client, may not be aware of the behaviour because it is hidden. Lower quality outcomes result.

To save money something has to be stripped out. As an example: for one project I know of, the tender came in at under the established market rate of the time ($3,200/m2), the HC spent a lot of time reviewing the prior tender, some weeks later it was magically around the set rate. In assisting with the review, I noted that one line item hadincreased by $40,000 (missed by the independent QS). As time rolled on, it came to pass that the line item shouldhave cost around $3,000 – $5,000. Bingo, a magic extra $40,000 to their bottom line. Unfortunately, this wasexposed. Time has not been friendly to the change, it would seem that the plan to reduce, or leave it off completely, has lead to a significant quality and compliance issue.

So for me, a small in-fill bespoke developer, I want to work with people who are motivated by the right reasons and understand that I am building homes for people. Please do not be a cog in a ruthless game of arbitrage.

Housing is not a traded piece of paper or a bonus to buy a boat for a middle-person taking a margin where they add no value (if they have added no value, their boat has been paid for by someone else).

Who wears the 10 year defects? The LBP for the trade. They screw up the structure, it is the subcontractor that has to fix it, not necessarily those in the business of arbitrage.

If you are using a HC model, it can work, just make sure they have been around for a long time, the directors are active, and they all really care about their brand.

This is my opinion, based on actual examples across several projects that have either been mine, or others that have been brought to my attention.

As a result, I am using the Contract Management model for my smaller projects.