Methods of Procurement in the Construction Industry

Extra notes to accompany these notes can be found overleaf.

There are 5 main methods of procurement. These are:

Direct Purchase – this is the buying of a predetermined item, such as a building or shell of a building etc.

Lump Sum Competitive Tender - This is where plans of work, designs etc are given out, and contractors submit prices for consideration. The lump sum is the price for the work completed. This system has been revolutionised by Latham and Egan (see below).

Negotiated Tender - This is usually for add ons or extra work – new rates or existing rates are decided for more work to be completed on the same site. This allows for speed and ease of securing new work on top of work already underway.

Design and Build – This is the favoured option in modern construction. Here the client will give an overview of what they want, but the contractor will design the project and give the best price they can for the design they have chosen. The idea will be submitted to multiple contractors each with their own design mechanics and so different prices and style of build.

Term Contracts – These contracts are usually made for maintenance and repairs of projects. The client and contractor will work out any problems that may occur or any refurbishment that will need to take place, and the contract provides that the contractor will get the job at the agreed prices and rates. This also allows for work to be phased out over timescales e.g. a multiple home owner wanting 200 bathrooms – they can do 50 per 6 months.

Egan and Latham Reports:

These reports looked at the way in which contracts were acquired under the traditional lump sum competitive tendering system. Egan worked for Jaguar and although people liked the look of Jaguar cars, they were unreliable. He decided that increasing the spending on components, would allow more continued sales of Jaguar cars – this meant that Jaguar made more money despite spending more.

He then worked with Latham to identify if this could occur in the construction industry. They suggested that clients assess not only prices given by contractors, but also made an assessment of the quality of the tender. Such as the quality of the components, other work, methods of working etc. They suggested that clients actually asked for method statements, so that they could see just how the work could be done. This would place a value on it that they could compare to the final price given for the job. It also gives the ability to assess the future value of the build, and any costs or savings that may occur due to the way of working or components used.

  Health and safety checks could be made using the method statements, and clients can see any problems in these areas before the work has started.

Partnering

This revamped system allows for partnering between companies. The client can identify not only who gives them the best price, but who they would work with best, and trust the most. One off project partnerships can occur, or longer strategic partnerships where someone is selected as a preferred partner of a client.

KPI’s or Key Performance Indicators can be used within partnerships to assess whether or not key points are being met as agreed in the original contract. This continuous assessment of both parties allows any flaws in the pairing to be identified and rectified.

Payment Methods

• Direct Payment. Payment is made in full for the project, usually in smaller lumps during the course of building, and a larger amount at the end.
• Lease back systems – money is borrowed to pay for the project, and the client then pays rent to whom they borrowed the money from. This goes on for a set number of years, usually until the cost is covered. There are then options to buy, or to continue the lease under new contract terms. In this situation, the running of the building is managed by the client.
• PFI or Private Finance Initiative - Modern version of lease backs. Here, rent is paid back under terms, but the financier also manages the building. So repairs, bills, running costs etc. These are all factored into the rent price.
• PPP or Public Private Partnership - Slightly different as this comes about from a fusion of private companies and public bodies. These are part owned by government, but management will be shared and ideas will be allowed to form. There is a shared interest in the project – usually public interest is providing a service, and the private sector provides more money and time but reaps more of the profit.

How has the introduction of partnerships changed the construction industry?

-Only saves money in some cases, clients must be fully committed.

+Lump sum tenders are adversial, lowest price means that people will work to spend the lowest amount of money – cheap components, no changes etc. Arguments will happen.

+Shared profit.

-Shared risk.

+Quality of the construction industry has improved.

+New financial schemes take the pressure away from finding and securing capital.

-Management and repairs of buildings can become expensive over time.

+Rent agreed at the beginning so financial situation identified early.

+Protection from fluctuations in prices – under a lump sum situation, if a change of price for materials occurred, contractor would have to pick up the bill.

+In partnerships, costs are fully monitored by more than one party.

+Payment plans allow future costs to be considered and covered by the rent. Smaller continuous payments, rather than being hit with a huge bill.

+An improvement in quality of components / work can be made with small payment increases in the rent rather than paying as little as you can just to get the thing done – value engineering.

+Value Engineering looks at the scope of the project. Because the client will be paying rent for years to come, they want to know how the build will be in years to come.

+In rent schemes, higher construction costs may reduce other costs factored into the rent – power repair etc. This is investing in the building for future plans.

Clients now no longer accept the lowest price as a right. They look for value and something they can invest in, as well as someone that they want to work with. They must feel a commitment to partnerships and are beginning to enter into framework partnerships. This is where ongoing work is done and provided for each other as preferred partners. This saves time and money for tendering everything. Mutual trust and a sense of loyalty grow. They want to see each other grow and get better to bring in more money. Quality assessments will now be done on all projects costing over £250,000.

These quality assessments must be precise so that they are fair and contractors are not unfairly forced out of contracts. These assessments will be scrutinised especially if the lowest price is rejected. Contractors will want to know why they have not got the job. This will allow the industry to improve overall.

The role of project managers has changed and they now need new skills. They must be able to identify quality control measures and they must be able to justify their decisions around quality.

Contractors are now brought in earlier to have an input in projects, and they can help with the value engineering ethos. The contractors, designers and client will pitch presentations to one another more often, and this will allow communication of information and ideas throughout the partnership. Everyone will know what they are working towards and they will have a shared interest. This also allows for the sharing of expertise amongst departments, and therefore, more informed decisions.

Conflicts can, and will come up. These must be managed and compromise don in order for the partnerships to work. One party may try to play one off against the other, or may form a collation against one party.

Each party will be tied to the maximum target price, and will aim to be as low as possible underneath this ceiling. This is because each will receive a share of the profits made if the price is lower. The client will save money, and the contractor will get a bonus. However, over this, and the contractor will have to pick up the bill as the client and the contractor both agreed the price. The contractor will not mess around to try and make more money.

References

Notes formed and processed by the author following lecture series by Martin Bradburn at Teesside University

Chudley and Greeno – Building Construction Handbook