We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime. Procurement Methods. Upcoming SlideShare. Like this document? Why not share! Guide to Construction Procurement S Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Lilian Nwachukwu , Lecturer Follow. Published in: Technology , Business , Design. Full Name Comment goes here.
Are you sure you want to Yes No. AloKingsley nice work really helpful. Zeekay Shun. Show More. No Downloads. Views Total views. Actions Shares. Embeds 0 No embeds. No notes for slide. Procurement Methods 1. C JULY According to Encarta dictionary , to procure means to acquire something: to obtain something especially by effort. In construction terms, procurement refers to the process of acquiring something.
This process of acquiring something has different approaches or methods; hence in the construction sense, procuring a building has different methods to it. When a project is dreamt about by the client, he works towards actualizing it. Apart from funding and providing land for development, the client does not have the requisite skill to actualize his dream. He has to employ the services of those who would do so. The task of designing his dream and its subsequent construction are open to different methods; hence to choose the most appropriate method for his project, he needs professional advice.
The method he chooses is dependent on some factors, which in the end should satisfy his need. What is procurement? Procurement is a term used to describe all activities undertaken by the client in seeking to bring about the construction of, or the refurbishment of a building. It is also referred to as method or system which seeks to weigh the pros and cons and the financial constraints which are likely to affect the project so as to select an effective contractual arrangement.
The simplest definition, according to Nagy, Kiss and Hornyak n. Traditional This method is as old as the construction industry. The major feature is that the design process is separate from construction. It also requires full documentation before the contractor can be invited to tender for the work. In summary, traditional method simply involves the steps- design, bid and build. Features of the Traditional System. There is no design responsibility on the contractor.
The structure of the traditional system is shown below: 4. Source: Naggy et al. Although the traditional procurement method is very simple to understand by all classes of client, the major problem it has, is that the contract period tends to be more prolonged due to the fact that design process is separate, and determines the commencement of the actual construction. Again the early and vital input of the Builder is not tapped; hence, the product is likely to be deficient in buildability and maintenability aspects.
Design and build. In this method, the contractor is responsible for undertaking both the design and construction of the work in return for a lump sum price. To arrive at a choice of contractor, contractors are required to develop a design from an initial concept prepared by the consultant appointed to advice the client to a certain level, prepare a tender figure and submit the whole package which is termed a proposal to be evaluated to meet the satisfaction of the client.
Evaluation of tenders in this case is usually difficult because the contractors are not working with one design. Tenderers should be informed of the criteria to be used, and whether price is likely to be a prime factor. The client works directly with the contractor, or he may appoint an agent to advice him, or act on his behalf. The Design-Build approach gives the client a single point of contact. However, the client commits to the cost of construction, as well as the cost of design, much earlier than with 6.
Whilst risk is shifted to the contractor, it is important that design liability insurance is maintained to cover that risk. Changes made by the client during design can be expensive, because they affect the whole of the Design-Build contract, rather than just the design team cost. Secondly, although the contract period is shortened, the process of assessing the tenders, and selecting a contractor can be difficult due to the fact that all the tenderers are working with different designs.
Management Procurement. This method of procurement is based upon the client appointing a consultant who will prepare project drawings and project specifications. Consequent upon this, a management contractor is then selected by a process of tender and interviews. The management contractor will not carry out construction work. Payment is made to the management contractor on the basis of the cost of the works packages plus the agreed fee.
Unless the team is drawn from companies which are experienced in this kind of team working, the benefits are not always realized. There is less price certainty at the outset, because construction tends to start ahead of completion of all design stages and at a point when many of the work packages are yet to be tendered for. This often means that adjustments will be made to the design and specification of works packages later in the programme to keep the project within budget.
However, the overall process of design and construction tends to be shorter than in either the traditional or design and build methods.
Construction Procurement Systems & Selection
The consultant may not be liable at all for the loss suffered by the contractor because it was not under any duty to avoid that kind of loss with respect to the employer. The claim was based on alleged deficiencies in the employer's requirements, which had been prepared by the consultants. The contractor said that these deficiencies led to their tender being too low, and as they had now accepted responsibility for the design, they had to bear this loss.
However, the court held that this was not the kind of loss which the consultants were under any duty to the employer to use reasonable skill and care to avoid in fact, the employer had made a saving as the tender price was lower than it would otherwise would have been and so no claim could be made against them. The loss in question was of a kind that could never, by its very nature, be suffered by the employer. Any such wording needs to be carefully drafted so as to, in effect, alter the scope of the consultant's liability retrospectively by making the performance of the consultant prior to novation and his potential liability for work done prior to novation judged on the fictitious basis that during that time the consultant had in fact been engaged by the contractor — the ab initio approach.
The inclusion of wording along the lines set out above will often be resisted by consultants and their insurers on the basis that it would involve a retrospective variation in the scope of the consultant's duty. Another consideration when drafting novation agreements is whether all the post-novation services remaining to be performed are appropriate given the consultant's duty is now owed to the contractor, where the contractor's interests and concerns are different from the those of the employer.
Some of the services set out in the original appointment may not be appropriate for an engagement by a contractor. For example, a provision which provides that the consultant is to assist the employer in any dispute with the contractor. Clearly this provision would be inappropriate post-novation.
There may also be services in the original appointment that should be differently worded in circumstances where they are being performed for the contractor rather than the employer and there may be additional services not mentioned in the original appointment that the contractor would like the consultant to perform. The situation has to be addressed at the time of novation and the parties can, if they wish, agree to a variation in the services remaining to be performed.
Finally, following a novation the potential for conflict of interest will be there as consultants will have to act in the interests of the contractor, although previously having done so for the employer. See also the chapter The law of contract. This is an implied term.
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This is a major advantage to the employer. The contractor is absolutely liable on his promise that the works will be fit for purpose unless excluded by the express terms of the contract. In a traditional contract, an architect or engineer's obligation to the employer will usually be that the architect or engineer promises only to use reasonable skill and care in the design.
This is an extremely valuable warranty. If the design turns out to be unsuitable, it is no defence to the contractor that he has exercised all reasonable skill and care in its preparation. The fact that the design is not fit for its particular purpose is enough to found liability. However, not surprisingly, contractors are often unwilling to accept this level of liability. In fact many of the standard form contracts such as the JCT Design and Build Contract Edition and the ICE Design and Construct 2nd Edition reverse the common law position so that the contractor has an equivalent liability to the employer for the design as would an architect acting independently under a separate contract with the employer i.
Reversing the common law position also avoids any potential gap in liability where the contractor subcontracts some of the design elements to appointed design consultants or specialist subcontractors who themselves are unlikely to accept a fitness for purpose warranty. It is generally very difficult to obtain professional indemnity insurance for a fitness for purpose warranty.
By contrast, with the design and build method, as the contractor is engaged much earlier in the process and it is its responsibility to complete or develop the design, this issue can be addressed. The contractor's input at this earlier stage may thus have the knock on effect of minimising delays and saving costs. In short, theoretically there is more potential for the contractor to add value for money for the employer. The ability of the contractor within this regard very much depends upon how detailed and prescriptive the employer's requirements are.
The downside of this can be that sometimes the employer may get a poor quality design with lower-quality materials which whilst complying with the employer's requirements may ultimately mean that maintenance costs are higher — something that may not concern the contractor unduly. Put simply, there is an overlap of the design and construction processes which increases the potential for the contractor to finish the project works earlier than say, the traditional method where design and construction is sequential.
The contractor and the employer therefore benefit from this flexibility. In addition, with the design and build method the contractor is not reliant or at least is much less reliant on the employer in providing necessary information required to progress the works as the contractor is responsible for its own flow of information. Whereas there is a potential for delays arising in the traditional method as a result of stoppages in the flow of information between the employer and the contractor, this problem can be addressed in the design and build method.
However, if the employer's requirements provide for information to be provided by the employer during the course of the contract, then this problem may persist. One advantage of having designers and estimators working closely together is that the contractor can use his knowledge of current market conditions and delivery time to ensure that the contract can progress smoothly. Although there is some price certainty by virtue of the fact that payment is usually on a lump sum basis, as design and build contracts generally place a higher level of risk on contractors, employers may expect to find this reflected in increased prices.
Costs can also be controlled where there are multiple buildings with the same specification — this is because there is no need to appoint a designer every time one is built. For example, supermarkets are often constructed to the same design specification and there is little point in engaging a designer every time one is constructed. The contractor may be able to obtain cost savings by choosing his own subcontractors and suppliers or by exerting his influence over the design and the materials to be used to make it more cost effective.
This also relates to buildability by ensuring that the design and the materials compliment each other. In addition, the employer can gain greater cost certainty if the contractor is made responsible for investigating site and sub-soil conditions. However, it will be appreciated that a contractor will include this risk in his overall price.
On large civil engineering projects the contractor may not be prepared to take the ground risk because the ramifications of extremely poor ground being found is too great or if it is prepared to take it, the price is increased to such an extent that the employer is unwilling to buy off this risk. More sophisticated clients are likely to be wary of any contractor that recklessly assumes the risk in its bid.
However, generally with design and build, the employer has little control over the detailed aspects of the design. It is said that one of the main drawbacks of the design and build method results from the fact that the employer leaves the completion of the design of the project to the contractor. For example, under the JCT Design and Build Edition, the contractor has no obligation to seek the employer's consent for details of the design, as long as they are compliant with the employer's requirements. As a result, this may compromise the quality of the design.
This may be acceptable if the employer is satisfied about the outline of the scheme and the details are relatively unimportant. Nevertheless, there is potential for the contractor to minimise costs by reducing the quality of the detailed design, for example, in the quality of the finishes or by designing something in such a manner that it is less costly to build but more costly to maintain. There is a large element of uncertainty and the employer's requirements are heavily relied upon properly to describe what is required.
However, this is a balancing act because of the employer's requirements are too overly prescriptive, this can undermine the benefits of design and build. Where any part of the works has been designed by the employer and that design has been identified in the employer's requirements, although the contractor is responsible for checking that design and assumes responsibility for that design, the contractor is required to obtain the approval of the employer's representative for any modifications to that design which the contractor considers to be necessary.
Further, to the extent required by the contract, the contractor is required to institute, and then submit, a quality assurance plan to the employer's representative for his consent before each design and construction stage is commenced. In addition, the employer may seek to retain some control by identifying performance criteria within the employer's requirements on which to base tenders. Without a professional team to advise the employer, inexperienced employers can find themselves in a difficult position when faced with a sub-standard design or construction.
If the employer wants to take independent advice on design issues once the building contract has been entered into or the design team has been novated to the contractor, then he will have to pay for this himself. This significantly reduces the difficulties in identifying who is responsible for problems as to progress and quality which can arise where responsibility is split.
Reflects practice — Arguably, this method of procurement better allows for and reflects the extent of the design generally undertaken by specialist subcontractors. Familiarity — Employers and contractors are now used to this form of procurement which arguably increases the likelihood of a successful project. From an employer's perspective the loss of control during the construction phase to the contractor may be more than adequately compensated by the contractor assuming greater risk. This places considerable emphasis on the employer's requirements to properly describe what is required without being over-prescriptive thereby undermining the benefits of design and build.
Inexperienced employer — The absence of an employer's professional team can make it difficult for an inexperienced employer who may be faced with sub-standard design or sub-standard construction. Inflexible — It has been said that, given it is necessary to complete a significant aspect of the design to obtain cost certainty and ensure some satisfaction with the design, the inflexibility of this approach may make it difficult to take advantage of market changes.
Contractors typically provide a construction programme, a price for preliminaries and a percentage for overheads and profit offered for the whole project. The employer decides between tenders on the basis of this information but also the skill levels, experience and resources that each tenderer can provide. This typically develops as a negotiation between the employer and the preferred contractor in relation to the terms of the building contract and the price. The point at which agreement is reached will vary between projects, however, the more the design is completed the greater the cost certainty.
The building contract is signed at the end of this stage and could be any form of contract procurement, that is, traditional, design and build and so forth. Two-stage tendering is less expensive and time-consuming than single stage tendering. For the contractor there is less money lost on unsuccessful tenders as his bid costs at risk only relate to him bidding on the limited basis of the first stage. Once appointed on the first stage, the contractor gets paid for the pre-construction services he provides. Earlier contractor involvement increases the opportunity for contractor input on buildability and value engineering.
Having the contractor involved earlier may mean that anticipated problems in the construction phase can be considered earlier. This can shorten the construction programme. Price certainty. The common view is that the preferred contractor's second stage tender should reflect more accurately the final construction costs as the price is based on more information and the contractor has increased knowledge of the project.
The risk is that the contractor has the chance to talk up prices. However, the employer can include provision in the pre-construction services contract or letter of intent for an option to withdraw from the second stage in the event that the preferred contractor does not submit a competitive second stage bid. If this price is exceeded, the employer has the option to go back to the market for a single competitive tender. The employer could go further and exclude the preferred contractor from making a fresh bid on the grounds that they already submitted their best price. However, practically speaking, going back to the market is likely to be an unattractive option for an employer because a new contractor will require time to learn about the project.
This will negate the time saved by using the two-stage process and the previous cost of getting a contractor involved early on will, in general, be largely wasted. See the chapter Tender process for further details on tendering. These two management-based procurement methods are management contracting and construction management and essentially came of age in the UK in the s. With these procurement methods, the contractor does not undertake any of the works, but solely manages the process.
Management procurement tends to be used where: maximum price competition for individual work elements is required to try and keep costs down but cost certainty at the start is less important an early start on site is needed and getting the building finished quickly is a priority the employer does not mind taking all the construction risk 6. It was also perceived as more accurately reflecting the structure of the industry with its dependence on the expertise of major specialist subcontractors and less work carried out by a multi-skilled main contractor.
However, this form of procurement is now used very little today. Also see The construction contract, this volume. Crucially it is the works contractors who carry out the work, not the management contractor whose only function is to manage and supervise the works contractors. The idea being that a contractor is best-placed to control the management process as they are, in essence, a poacher turned gamekeeper. The management contractor enters into a series of works packages with the works contractors, who will look to him for payment.
Typically, the works contractors will be selected by way of a competitive tender procedure described in the management contract and be employed on an agreed form of works package. The management contractor is reimbursed any costs which it expends in employing the works contractors prime cost save for those costs incurred through his own negligence and is paid a management fee which will either be a lump sum or a percentage of the prime construction cost.
The employer therefore does not have any direct contractual relationship with the works contractors unless he obtains collateral warranties from them Figure 3. Figure 3Typical management contracting structure 6. However, the NEC3 Option F provides a mechanism whereby the management contractors can undertake elements of the work. In effect, the contractor has become more of a consultant, getting rid of most of his labour force, plant and equipment and minimising his otherwise significant operating costs.
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Instead each works contractor will bring and be responsible for his own basic items, such as scaffolding. The management contractor may also provide a site management group and preliminaries such as offices, temporary power and a canteen. Crucially, however, under the terms of certain management contracts the management contractor is not responsible for the default of the works contractors. The aim is to distribute the contractual risk for the construction of the building between the employer and the works contractors so that the management contractor is not legally responsible for the default of the works contractors.
In short, although the management contractor agrees to ensure that the work is carried out without defects and on time, the management contractor is protected if the only reason for breach of this obligation is a breach by the works contractor. Provided that the management contractor complies with the terms of its contract, and administers the work contract properly, it is reimbursed for all sums payable to the works contractors. So the management contractor does not take the risk of their defective works or delay — but this is subject to the management contractor not having breached his contract itself.
This potentially leaves the management contractor with very little risk. However, the proviso above is important as was demonstrated in Copthorne Hotel v. Arup Associates more particularly described below , where a management contractor ended up out of pocket after a works contractor went insolvent. One of the fundamental principles underlying the apportionment of risk is that where a risk is transferred from one party to another, a financial adjustment should be made to balance that risk.
The types of project that are usually seen as most suitable as management contracts involve a high degree of commercial risk. If a contractor under the traditional approach was asked to tender for such a project, then the tender would have to be inflated to accommodate the associated risk.
Therefore, it is in both the contractor's and employer's interests for there to be low risk contracts. The management contractor will usually be obliged to take all necessary steps to enforce the terms of the works contracts which may include pursuing the works contractor in dispute proceedings if the employer so directs. The management contractor would then pursue recovery from the defaulting works contractor.
If this is not possible due to insolvency for example then the employer has to make up the shortfall. Thus, the employer takes the insolvency-risk of the works contractors — in contrast, under a design and build contract or traditional procurement route, the main contractor would normally take the insolvency risk of a subcontractor.
An Introduction to Building Procurement Systems
Indeed, in general, if there is any shortfall between the amount recovered by the management contractor from the works contractor in default and all the costs the management contractor has incurred because of the default, then the management contractor will usually be entitled to recover the shortfall from the employer.
The amount the employer can recover from the management contractor for any breach by a works contractor's default is capped by the amounts which the management contractor recovers from the defaulting works contractor. The general effect is that it is the employer who bears the risk of any default of a works contractor. However, other management contracts may not contain this relief provision. For example, the risk of delays by works contractors may be imposed on the management contractor so that the management contractor is liable for liquidated damages even though the delay was caused by works contractor default rather than any default of the management contractor in the performance of his management obligations.
Some argue that contracting on this basis, however, would undermine the management contractor's incentive to act in the employer's best interests. For example, imposing this provision may mean it will be in the management contractor's interest to ensure the works contractors were entitled to extensions of time. With both the JCT Management Contract Edition and the NEC3 Option F, the management contractor pays the amounts due to the works contractors prior to receiving payment from the employer, that is, the management contractor must incur the cost prior to being reimbursed from the employer.
Nonetheless, even where the management contract does include the relief provisions such as limiting its liability for defaulting or insolvent works contractors to amounts it recovers from the works contractor, the management contractor will not be able to rely on the relief provision to recoup its losses from the employer to the extent that it has itself caused or contributed to such losses by failure in its own management responsibilities Copthorne Hotel Newcastle Ltd v.
The issue before the Court of Appeal in Copthorne Hotel was whether Bovis, as management contractor, could be liable under the contract for any defects which occurred as a consequence of a breach by a works contractor. However, the court held that the extent of this protection was limited. If the facts show that the management contractor is indeed in breach of his supervisory role, then he is responsible to the employer in his own right.
He must then bear responsibility regardless of the fact that he, the management contractor, cannot recover against the works contractor because of the latter's impecuniosity.
What are the main types of procurement in the construction industry? | Build Up
In addition, a management contractor may have to account to the employer for liquidated damages insofar as delays have arisen as a result of the management contractor's failure to perform its management services. We have already noted that in certain relief provisions, the management contractor is only liable to the employer to the extent that he recovers from the works contractor. Thus, if he recovers nothing from a defaulting works contractor, he has nothing to account to the employer. Thus, if nothing is awarded to a management contractor from the defaulting works contractor he is in no worse or better position that he would have been if the management contractor had been awarded damages.
The contractor is also appointed during the design phase so that the contractor can work with the professional team and contribute his construction expertise to the design process. Because of this it is usual for a management contractor to be an experienced contractor, although this is not necessarily a pre-requisite.
The early appointment of the management contractor effectively enables the contractor to become part of the design team, thereby providing benefits such as value engineering and potentially giving advice on the buildability of design proposals without the client giving up control of the design and hence what the employer ultimately gets to the contractor which is more likely to happen in design and build procurement. The contractor will also look at the proposed divisions of the building work into works packages and the content there in and at pricing, programming and procurement. Each works package is tendered and let as and when sufficient design information is available and which suits other information and actual progress on site.
The design and construction phases are intended to overlap as this not only provides a longer period for completion of each activity in itself but also improves the speed of the project to completion. One advantage of letting the building work in packages is that it permits flexibility as design decisions can be left until a later stage than in traditional contracts. Put simply, management contracting should enable the project to finish more quickly than if the contract had been let on a traditional procurement basis where design and construction are sequential.
Because of the distinct role the management contractor can have during the design phase, some standard form contracts such as the JCT Management Building Contract Edition distinguish between the pre-construction phase and construction phase. This enables the employer to terminate the employment of the contractor after the design phase before construction work actually commences. In consultation with the management contractor, the works packages may be more suitably bundled to suit the construction process.
Independent design advice for the employer is maintained. The employer may achieve cost savings. The commercial argument given for this is that on a risky project i. Thus, if the risk is removed from the contractor, the contractor should drop his price for the work, thereby achieving cost savings for the employer. Certainly, the management contractor can use its market position to negotiate keen prices and maximise any discounts which will be passed on to the employer. Fast tracking.
The completion date can be achieved more quickly than with other procurement methods. Early packages can be let to works contractors and construction of the project can start before the design of the later packages is completed. In practice, this approach does carry risk, particularly the risk of variations to earlier packages as a result of the development of design of later packages. Who is more ideally placed to manage and co-ordinate the works contractors than a contractor? Design and construction liability is very diffuse. It is split between the many works contractors and consultants and in the event of a major dispute is likely to either lead to a multitude of proceedings or multiparty proceedings.
The diffuse nature of this procurement route means that interface defences are easily raised by potential defendants and may be difficult to rebut. The only person taking overall responsibility for the default of all the works contractors is the employer. This responsibility falls on the contractor in traditional or design and build procurement routes. There is no direct contractual link between the employer and the works contractors unless collateral warranties are used. Employer takes insolvency risk on works contractors this is obviously an advantage to the contractor.
It removes the problem of there being no contractual link between the employer and those actually doing the work that is inherent in management contracting. Rather the construction manager occupies the managerial position in construction management. The construction manager acts as consultant and agent to the employer in engaging trade contractors to carry out the works packages.
As can be seen from Figure 4, the employer will need to engage its own professional team to undertake the design. As with management contracting, the construction manager is ideally engaged at the outset of the project so that it can work as part of the professional team during the design stage. Figure 4Construction management structure The trade contracts may be negotiated or competitively bid and either lump sum or cost reimbursement. In view of the risk it is thought that the employer should be involved in the management of the risk.
In addition, the employer is also likely to have to be involved in the day to day running of the project. A further effect of the direct contractual relationship between the employer and the trade contractors is that trade contractors should be paid more quickly under this system than under the management contracting system. This may lead to substantial savings for the employer as the trade contractors do not have to budget for lengthy payment delays as cashflow for any contractor is extremely important.
The construction manager will therefore perform services similar to the ancillary services traditionally provided by the professional team in other procurement methods. Although the construction manager may be appointed as contract administrator, employers may wish to restrict his authority in certain respects. For example, in relation to the issue of instructions with particular consequences such as costs or delays over specified levels , the acceptance of tenders or the termination of trade contracts.
The employer may wish to be the party who ultimately makes these decisions. The extent of the obligations of construction managers was reviewed in Great Eastern Hotel v.