Construction Procurement Guide

Construction Procurement Guide - an overview of the major means of construction procurement currently in use in UK construction - written by Andrew Hudson for Laxtons 2008.

Introduction

There are numerous issues that need to be considered when deciding upon the means of procurement of a building project, and which will determine the Form of Contract to define the obligations and responsibilities between the Parties.

Procurement is the term used to enable the process of creating a contractual relationship. There are four essential elements:
1) Offer
2) Acceptance
3) Consideration (payment)
4) The intention to create a legal relationship

Factors which influence the procurement process include:
• the experience of client and the business case for the project including any particular requirements that the client may have
• the client’s desired programme for development, including the timing of the start and finish dates
• the nature, size and complexity of the project
• the state and completeness of the designs
• the degree of cost certainty, or conversely the requirement for risk aversion
• the need for competitive prices
• the apportionment of risk between client and contractor

There are eight main recognised procurement routes:

a) traditional (bills of quantities; schedules of work; specification and drawings; and the like)
b) target cost
c) design and build; and target cost design and build
d) design, manage and construct
e) management contracting
f) construction management
g) engineer, procure & construct (turnkey) - not dealt with here
h) partnering (also a process – see below)

With the exception of partnering, all of the above routes can be used with:
• a single stage process (tendered or negotiated)
• a two-stage process
• as a process to define a GMP – guaranteed maximum price

Further specialised routes used by public authorities are PFI – the private finance initiative; and PRIME contracting. In the latter case variants of PRIME contracting have been adopted by the NHS, Defence Estates and several ‘blue chip’ private sector organisations. PFI and PRIME are not dealt with here.

For the HM Treasury definition of PFI see: here

For a definition of PRIME contracting see: here

Partnering as a route and a process

Partnering is both a procurement route and a tendering process. Although now well defined and much written about, it is still misunderstood by many professionals and contractors alike, who consider that they have been partnering with their clients long before Egan, having had longstanding and ongoing relationships with clients for a considerable number of years. However, in many cases this is not partnering in the style championed in 1998 by The Egan Report, Rethinking Construction.

Partnering seeks to create relationships between members of the whole project team including the client, design team , contractor(s) and the underlying supply chain. This creates a framework to deliver demonstrable (through KPIs) and continuing economies over time from: better design and construction; lower risk; less waste (time, material, etc); and as a result avoid disputes. Partnering workshops provide for better knowledge, communication, sharing, education and team building to create a much more purposeful relationship than merely continuing to work together with a client.!

Egan's Partnering is discussed more fully later.

Single Stage as a process

The single stage process is in many cases the conventional process of procurement. Tenders are sought based upon one of the routes set out herein and bids are considered and a contractor selected and then appointed based upon chosen criteria defined to suit the project. In most cases the choice criteria involved in the contractor selection will be based upon the most economic cost, but can also be based upon programme, quality of design solution (in the case of a Design and Construct Tender) or a mixture of these criteria.

Two Stage as a process

In the case of a two-stage process, the selection of a contractor is made by means of a first-stage tender early in the project programme before the design is well advanced. With the exception of partnering this process can be used in connection with most of the routes listed above

Normally, the first-stage is by means of a competitive tender based on limited elements of the work, for example: • a schedule of unitary rates provisionally prepared from the design drawings as prepared at the time of the stage-one tender; *
• preliminaries costs (site staffing, plant, site setup, scaffolding, craneage, insurances, etc);
• the percentage required for overheads and profit;
• the percentages required on Dayworks;
• additions required on the sub-contract work which is to be sub-let;
• submission of CV’s for proposed site and head office staff; and
• method statements - so that the contractor’s understanding of the project can be assessed by the design team and the client.
*

If time and design information is available, measurements might be made of selected major work elements (for example demolitions) and Bills of Approximate Quantities (or a Schedule of Works) can then be included for fuller pricing in the first-stage documents.

At stage-one a Contractor is selected from bids made on the basis of the limited information available at the time and will often include, but is not limited to: • proposed preliminary costs
• proposed overheads and profit level(s)
• labour costs
• principle plant costs
• sub-contract works cost, where these can be defined to a level that can be priced
• interviews and assessments of the contractor’s proposed staff
• project understanding and proposed method statements
• the contractor’s willingness to enter into the second-stage negotiations
• and the like

The second-stage, a Bill of Quantities/Schedule of Work or a more fully detailed Schedule of Rates or a mixture of both, is generally prepared by the Quantity Surveyor and is priced with the chosen contractor by means of ‘open book’ negotiation in order to calculate the contract sum.

As referred to above, a two-stage tender process can overlay any of the ‘traditional’ procurement routes and can bring an additional set of advantages and disadvantages to the chosen means of tendering. Set alone, two-stage procurement can provide:
• Early appointment of contractor and access to his experience of programming and buildability.
• An earlier start on site than with a single stage process, because the works can proceed, if required, before a contract sum has been negotiated and fixed.

However two-stage procurement does not establish a firm contract sum at the time when the contractor is initially appointed as this is calculated later. It is therefore most appropriate for projects where an early start on site is required and where a project is reasonably well defined, in terms of the scope of work; and for which management or construction management are not considered appropriate.

Guaranteed Maximum Price (GMP) – as a process

A GMP can be tendered at outset, but more often a previously tendered lump sum contract (excluding Target type contracts) is converted to a GMP following a traditional single or two-stage tender process utilising:
• Bills of Quantity (either Firm or Approximate); or
• a Schedule of Works; or
• Specification and Drawings

Thus the definition of a GMP can occur, either before commencing the works or during the course of the works. The GMP is negotiated with the chosen contractor and his sub-contractor(s) on a basis that includes for the contractor’s future design development of the scheme, albeit in many cases the initial tender methodology may not have included design.

The Contractor therefore assume a larger element of risk that with other contract relationships and takes responsibility for matters that would normally cause extensions of time and potentially additional payment(s).

There are no generally available standard Forms of Contract for a GMP, it will require a bespoke contracts or a standard contract modified by a bespoke addendum agreement.

The advantages of a GMP are that it:
• Gives cost certainty similar to that of a design and build contract whilst the client employs and retains control of the design team.
• Provides the client often with a more appropriately detailed building than might be the case if let as a design and build contract, because the client’s design team retain control of detailing.
• Potentially means that the design needs to be completed to a greater degree than normal in order to let contract as a GMP, because after the GMP is agreed all variations that cause change, will attract cost and programme alterations. Therefore the design team will want to avoid such ‘change’

However, it is also important to note that a GMP contract has the potential to provide ‘rich’ grounds for disputes; particularly in respect of whether varied work has resulted from design detailing and therefore included in the GMP, or whether it is a variation caused by client change, which is an addition to the contract sum.

Very few contractors have experience of GMP contracts and those that do have had mixed experiences. Particularly because the financial and programme risk for unforeseen circumstances is entirely borne by the contractor.

The creation of a GMP creates certainty for both parties. However, a GMP can mean that the contractor can take a heavy fall if things go wrong! Examples of major GMP style contracts are those for the Cardiff Arms Park and also the new Wembley Stadium.

With the exception of a GMP, the eight routes noted are served by a plethora of standard forms of contract, sub-contract, supply agreements, warranties, etc. Such forms are widely available, with versions for use in England versions for use in England and Wales, and Scotland, where the law relating to contract differs from English law.

The success of any procurement route and process will depend largely on the ability and experience of both the chosen designers and contractor(s).

At the time of Tender, it is therefore very important that care is exercised in the selection of tendering contractors. In all cases it is to be recommended that pre-tender interviews take place with the potential tenderers to confirm their suitability for the work in advance; followed by both mid-tender review meetings and post-tender today. It is by definition not intended to cover every type of procurement route nor all the issues and therefore should be considered as a guide only. The following links describe various methods of procurement and each is discussed for: basis; advantages; disadvantages; and suitability:
- Bills of Quantities
- Bills of Approximate Quantities
- Specification and Drawings
- Schedules of Work
- Target Cost
- Management Contracting
- Design and Build
- Target Cost Design & Build
- Design, Manage and Construct
- Construction Management
- Cost Reimbursable or Prime Cost
- Measured Term Maintenance Contract

Conclusion

The choice of a procurement route and tendering process is a complex matter. This section has attempted only to set out the main features of the principal procurement routes and processes available.

It is intended as a broad guide only to assist in understanding the main issues, advantages and disadvantages. In order to make a full assessment of what can be a set of complex issues, you are strongly advised to seek professional advice.

http://www.kerncm.com/procurement.aspx