Procurement in Construction Management


Procurement in Construction Management: Procurement Methods


Executive Summary 

There are a plethora of methods so as to procure a building project that is available in the market and fulfill the needs of the clients. It is a daunting task to decide the method to be used for the project according to the objectives and priorities of the client which are improve the projected likelihood that is being procured successfully. It is imperative to make the decision as early as possible, and it must be underpinned by the business case of the client and his project. Further, the client must be provided with the insights of the risks and the effects of the procurement method on the project.
This report provides an insight into the procurement method to be adopted by the client and outlines the various means which can help in obtaining the objectives of the projects related to the procurement method. A clear understand towards the characteristics of various procurement methods have been provided in the report. The procurement methods provided in the traditional, design and construct and management. Further the report discusses the advantages and disadvantages of each method.  

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A procurement system is also known as the delivery system and can be defined as an organizational system which is responsible for assigning authorities and responsibilities to the people as well as the organization. The procurement system helps in defining the various elements present in the project construction (Love et al. 1998:p.222). The procurement systems are classified as Traditional, Design and construct, Management and Collaborative. 
These systems have been sub-classified but these sub-divisions are seen to proliferate as per the market demands. It has been stated by Holt et al. (2000), many variables are presented to each of the adopted procurement strategies. For instance, about eight variants of the design, as well as construct systems, have been identified in the procurement guidelines of the NSW Government (2005). There are a variety of commonly adopted contract methods and the procurement systems which have been discussed below. This report discusses the first three procurement systems namely Traditional, Design and construct and Construction Management. The report provides a detailed description of the various characteristics and the conditions for using these procurement systems. The paper further discusses the various risks associated with the procurement system and the client will be affected by all the discussed methods. A figure provided below provides insight on how the client will be affected and the speculative risks for the client and the contractor for a particular procurement method.
The contractor first assumes various risks in the design and construct forms of procurement present in the project. The variations in the design and construct are present where the various levels of the design risks are apportioned. The intention is usually to balance the fair and risks among the parties in the tradition lump sum contracts. However, greater the risks assumed by the contractor with greater balance there is a higher tendency to have the larger tender figure. The balance of the risk is seen to be most onerous for the client in the management forms of procurement as the contracts provide only the ‘management expertise' to his project.


A. Traditional Procurement

In this traditional procurement approach, it is accepted by the employer that the design work will be going to be separated from the construction. The consultants must be appointed for the design and cost control, and furthermore, the contractor is hired for taking responsibility of the carrying out the work. The authority and the responsibility must be extended to all the material, and workmanship and hence encompasses the subcontractor's and supplier's works. One usual method of appointing the contractor is through the competitive tendering on the basis of complete information and knowledge. However, in some cases, the appointment takes place by negotiation on the basis of notional or partial knowledge.  
There are two-stage tendering in the traditional method and sometimes occurrence of the negotiated tendering takes place and therefore it is also known as the ‘Accelerated Traditional Method.' In this procurement method, the design and construction is usually seen to run in a parallel manner in a limited extent. This form of procurement method allows start of the project on the site at a comparative early stage and also less certainty is entailed regarding the cost issues. There are three types of contracts in this procurement method:

  • 1.    Lump sum contract – The contract sum is usually seen to be determined before the construction starts and the agreement also has the amount entered in it. 

  • 2.    Measurement contracts – The contract sum is identified on the completion of the project.

  • 3.    Cost reimbursement – Based on the actual labor costs, material and plant costs, and the contract sum is seen to be identified, and a cover overhead along with profit is also added to it. (Rowlinson, S., 1999).

 Advantages and disadvantages
The main benefits of this approach towards the procurement are listed below: 

  • 1.    Because the contractor's bid on the same criteria and basis, there is a competitive equity;

  • 2.    Accountability owing to the competitive selection;

  • 3.    There is a direct influence among the design lead and the client facilitating an advanced level of functionality and therefore improving the overall design and its quality;

  • 4.    The certainty of the price at the contract award;

  • 5.    Any change or variation in the contract is easy to manage and arrange;

  • 6.    The market is familiar with the tried and test method of procurement.

The main disadvantages of this approach towards the procurement are listed below: 

  • 1.    The process of full contract documentation is a timely process. Although there is a provision of production of an incomplete design from the tender documents but this case might lead to less cost as well as time and therefore its ultimately leads to disputes.

  • 2.    The overall direction of the project is seen to take a longer time as compared to the other procurement methods of the sequential strategy. Furthermore the construction cannot be commenced before the design gets completed; and  

  • 3.    There is no input given to the planning or designing of the project by the contractor because the contractors are not seen to be appointed by the design stage.

B. Design and Construct Procurement 

In the design and construct procurement method, the responsibility of for almost all the designs is given to the contractor. Hence there must be a provision like the express reference in the contract along with setting up of the design liability in a clear manner. In case the statements in the contract are stating otherwise then the liability for design becomes an absolute liability which helps the contractor to warrant the purpose and its fitness. The design liability of the contractor is seen to be limited in the cases of some of the design and construct forms to the professional duty which has to be exercised with reasonable skill and care. When the contractor hires an independent consultant, they are, hence, under the liability which is no greater than the normal ones. Unless it is backed by some kind of indemnity insurance, the acceptance of this liability is seen to be worthless. Therefore it must be checked before appointing any contractor. The contractor can use external consultants in the absence of the in-house designers, but the identity has to be established before the acceptance of the tender (Skitmore, R.M., and Marsden, D.E., 1998). 
The requirement of the clients can be stated in a simple and brief manner more than the accommodation schedule and the site plan. Or it includes a hundred pages of specifications. This procurement method offers a certainty on the sum of the contract and therefore brings cost benefits. A competitive price is provided to the client due to a close integration of the freedom given to the contractor for using their purchasing power with the efficient market knowledge and design and construction methods. This method helps in ensuring the quicker start at the site and even results in effective programming. But the process required time due to the consultants of the client preparing the requirements and further comparing and evaluation of schemes so as to compete in the tenders. Any change in the contract can be costly afterward.
Advantages and disadvantages

The main benefits of this approach towards the procurement are listed below:

  • 1.    The client is allowed only to deal with one firm at a time thereby reducing the need for committing towards the resources and time for contracting all the designers and contractors individually; 

  • 2.    Before the construction commences the price certainty is obtained due to the requirement of the client which are highly specified and changes are not introduced; 

  • 3.    Stimulation towards the innovation and reduction in the time and cost takes place due to use of a guaranteed maximum price with a savings option split; 

  • 4.    The project time can be reduced due to overlap of the design and construction activities; and 

  • 5.    The constructability due to input of the contractor into the design.  

The main disadvantages this approach to procurement are: 

  • 1.    There are high chances of difficulties to be experienced by the clients during the preparation of an adequate as well as appropriately comprehensive brief;

  • 2.    Any client changes in the scope of the project can be expensive;

  • 3.    There is always a difficulty in comparing bids due to different design and variations of the project program among the bidders, and lastly, the project prices are going to be different for each design;

  • 4.    The commitment from the client towards the concept design is required at an early stage and is usually demanded before the completion of the detailed designs; and 

  • 5.    Limitations of the design liability to the available standard contracts. 

C. Construction Management Procurement 

In this procurement method, a contractor is paid the fees in order to manage, develop the program and then the coordination of the design and construction activities. Further, he is responsible for facilitating the collaboration in order to improve the constructability of the project. The contractor in this method is selected after an intensive selection process and is then paid the promised management fee. The work contracts are arranged, and the consequently administered by the management contractor but they are in a direct contact between the work contractor and the client. Therefore, this procurement method provides a higher control measure but it indirectly possesses a considerable amount of risk to the client. The management contractor does not guarantee the completion time as well as cost and is merely considered as an agent. Walker (1999) identified various advantages which are summarized as given below:

  • There is a reduced confrontation among the supervising team and the design teams.

  • The construction management expertise are involved in an early stage; 

  • There is a good overlap of design and construction; 

  • In the large projects, there is an increased competition towards the construction work because of the work packaging as well as the construction activities are digested into a more digestible 'chunks'; 

  • Higher level of documentation development; 

  • There are lesser number of contract variations;

  • This method provides public accountability;

  • There is no need for the nominated trade contractors.

Advantages and disadvantages

The main advantages of this approach procurement are:

  • The client is usually committed to the one firm only which helps in improved coordination as great collaboration among the designers and the constructors; 

  • There is a high potential of the saving of time for the overall project in the design and construction activities being overlapped efficiently;

  • It is the responsibility of the contractor to assume the risk as well as the responsibility for the integration of the construction and the designing. 

  • The works packages are let at the current competitive prices; 

  • There is an improved constructability through constructor input; 

  • All the roles, risks as well as the responsibilities of all parties are extremely clear; and 

  • There is a scope of flexibility for changes in design and construction. 

The main disadvantages of this approach in procurement are: 

  • The price certainty cannot be achieved until letting of final works package takes place. 

  • There is a requirement of the informed and proactive client.

  • The price certainty is relatively poor. 

  • Requirement of the close time and information control 

  • The client loses all the direct control towards the design quality because is it directly swayed by the constructors.

  • A good quality instruction must be provided to the design team due the incompletion of the design until resources are intensively committed to the project. 

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  • Walker, D., Sidwell, A. & Hampson, K. (1999), Project Procurement and Alliances - A Continuum of Competition to Cooperation, RMIT, Melbourne

  • Love, P.E.D., Skitmore, R.M., and Earl, G. (1998). Selecting a suitable procurement method for a building project. Construction Management and Economics, 16(2), pp.221-233. 

  • Love, P.E.D., Gunasekaran A., and Li, H. (1998). Concurrent engineering: a strategy for procuring construction projects. International Journal of Project Management, 16(6), pp.375-383.

  • Holt, G.D., Proverbs, D., and Love, P.E.D. (2000). Survey findings on UK construction procurement: Is it achieving lowest cost, or value? Asia Pacific Building and Construction Management Journal, 5, pp.13-20.

  • New South Wales Government (2005). Procurement Methodology Guidelines for Construction. Version 1, February, NSW Government, Sydney, Australia.

  • Skitmore, R.M., and Marsden, D.E. (1998). Which procurement system? – towards a universal procurement selection technique. Construction Management and Economics, 6, pp.71-89.

  • Rowlinson, S. (1999). Selection criteria. In. Rowlinson, S., and McDermott, P. Procurement Systems: A Guide to Best Practice in Construction. E & F Spon, London, pp.276-299.

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