Lecture 30 January 2013 Procurement with the construction industry

CONTRUCTION CONTRUCTION LAW LAW LECTURE 2 INTRODUCTION PROCUREMENT WITH THE CONSTRUCTION INDUSTRY

PROCUREMENT:

PROCUREMENT:

DEFINITIONS •

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The procurement strategy identifies the best way of achieving the completion of a construction project - often taking into account the best value for money over the entire life cycle of the building or facility. The term procurement method is used to describe the often complex network of  relationships which are formed between clients, consultants and construction companies, to enable a building project to be realised.

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The aim of a good procurement strategy is to achieve the optimum balance of risk, control and funding for a project. The choice of a particular procurement strategy largely depends on a client's required balance of cost, quality and time risks.

DEVISING THE PROCUREMENT STRATEGY •

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At this stage, it may be useful for the procurement team to check their understanding of the client's requirements by 'playing back' what they believe the client is trying to achieve. As part of this exercise, the team may offer the client a selection of 'high level' construction project outputs, for example: (i) a building at a stated cost; (ii) a building of a certain size, shape, appearance and quality; and (iii) a building to a defined timescale.

PROJECT PROFILING •

At this stage, a project profiling will be required. For an increasing number of construction professionals so-called ‘radar charts’  are a useful reminder of key points to be considered and performances recorded. The figure above is a radar chart which presents the three elements of cost, time, and quality in terms of contract priorities. Even where they are not in conflict, these elements need to be reconciled and ideally balanced. Asking the right questions at the right time might result in a visual profile which allows quick comparisons, and help in arriving at the appropriate contract.

DRIVING FORCE •

Cost

The cost of the project will be of paramount importance to the client, in that often a business investment decision is based upon the balance between the return or benefit to be achieved against the investment to be made. This is often considered as being two sides of an equation which must always balance each other out - with the s urplus (as added value) being the difference between the resource input (the investment) and the benefits to be obtained.

PROCUREMENT: COST • •

Q. Is there a need or desire for cost certainty?  It is particularly important to clarify some of the cost considerations, by addressing such questions to the client at the outset. For example the lead consultant mi ght wish to raise:

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Q. Is there a set limit, which the Contract Sum must not under any circumstance exceed ?  Comment: the client might have limited funding and require the reassurance of a fixed price with no risk of fluctuation.

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Q. Is it essential to know precisely the cost of the work before operations start on site?  Comment: this suggests that the work needs to be measured and described in detail at tender stage – possibly by use of firm quantities.

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Q. Once the contract is signed, in the event of variations is the client authorised to incur additional  expenditure?  Comment: it may be that the client has to rely heavily on some ‘once and for all’ external source of grant aid or other funding, and there may be conditions attached.

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Q. Is the contract to be awarded to the lowest tenderer regardless of other  considerations?  Comment: value for money will not always be achieved by this process. Designing down to a figure might mean excessive running and maintenance costs later on, which the client sho uld take into account. There might also be stipulations concerning quality, imposed by a grant aiding body where this is conservation work.

COST •

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Q.Do the circumstances dictate remeasurement of the works? Q. Must all tenders be on a competitive basis; are restrictions placed based on the form of funding available or required to b e used? The legal framework and business type must be taken into account. In Mauritius, most public authorities have to go competitive bidding under the Procurement Act. Q. Is the tenderer expected to allow for any increases in labour and materials etc. when pricing? 

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Comment: it may be in the interests of the client to forgo cost certainty and accept a price based on known factors, assuming that fair and controlled increases can be dealt with under fluctuations provisions. Much will depend on the state of the market at the time, on the anticipated duration of the job, and on the projected means of recovering the capital expenditure.

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Q. Is total accountability an imperative? Must every penny be satisfactorily accounted for?  Comment: public bodies in particular are subject to the scrutiny of the auditor, and are also understandably sensitive about any allegations of dubious practice.

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Q. Does the client have rules or standing orders which require evidence of competition when sub-contractors or suppliers are invited  to tender?  Comment: commercially minded clients often need it to be demonstrated that no opportunity for the best deal has been overlooked. Many public bodies have approved lists for selected items.

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Q. What is understood by ‘cost considerations’? Capital expenditure only, or are maintenance and life cycle costs also to be taken into account?  Comment: the lead consultant has a duty to advise the client of any long-term implications

Quality •

It is essential to agree what is meant by ‘quality’ both in respect of services and the finished project, and to define what measurable standards are to apply.

QUALITY (2) •

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Q. Are considerations of commercial prestige and public image likely to influence the degree of quality  desirable? 

Comment: some client bodies have a house style which expresses the efficiency or market-commanding confidence of the company, and which they would wish to see embodied in their buildings for example Brand Design for Hilton, Holiday Inn Q. Is it important to use high quality materials? 

Comment: for example, the project might be located in an environmentally sensitive spot such as a conservation area, or perhaps subject to stringent planning permission conditions. On the other hand, the project might just be an envelope for some retailing or industrial process.

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Q. Is this a historic building or, for example, a Passiv Haus, where work will require higher than average standards of craftsmanship? 

Comment: in a historic building, it may not be possible to establish how much work is likely to be entailed, or to describe and measure it before opening up. Control by the client as work proceeds is essential, and anybody responsible for funding might impose conditions.

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Q. Is it essential that all matters of design and specification are firmly under the control of the design team, and that specialist sub-contractors or suppliers are named or otherwise selected by the client? 

Comment: where the architect is lead designer, in the absence of anything to the contrary, this is likely to bring at first instance design responsibility. Even where design work is to be undertaken by others, the responsibility for coordination and integration into the overall design will remain with the lead designer.

QUALITY (2) •

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Q. Is it safe to entrust certain design details to the contractor’s own organization (with agreement to sublet) without the quality of the design concept overall being impa ired?  Comment: unless a contractor’s design obligation is expressly referred to in the building contract, this is unlikely to be implied under standard forms of contract. Even where the contractor or sub-contractor is responsible for some design input, it might be essential to make a provision for designs to be submitted to the client before work is actually carried out.

Q. Is the building intended to be relatively maintenance-free? 

Comment: this is not an attainable goal! The best that can be achieved is minimum maintenance. So what is the expected life span? When will major components be in need of upgrading or replacing? Is the overall appearance intended to last for a fashionable cycle only and due for a face-lift which will not involve structural change? Is there need for such eventualities to be programmed at the outset? Q. Does it make good commercial sense for the client to provide for a constant site presence to monitor the contractor’s control of quality? 

Comment: should the contract allow for this, and if so by what means will it be achieved? What might be expected of the contractor in terms of quality management and perhaps evidence through relevant KPI information? Q. Can some or all of the work only be performed by a firm with specialist expertise? 

Comment: this might mean selecting a contractor after interview and negotiation rather than by competitive tendering. It might result in appoi nting the contractor at design stage in order to benefit from advice on construction methods and materials, and possibly to provide specialist design input. It would probably affect the production of information. It could result in appointing a s pecialist firm as the main contractor, leaving general builders’ work to be sub-contracted.

TIME •

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The financial benefits of undertaking the project in the first place will usually be based upon certain programme constraints. The projected financial outcome will therefore only be achieved in full, if the project commences the 'delivery' of its benefits in line with a particular timescale. HOW TO ACHIEVE TIME SAVING?

TIME SAVING METHOD ACHIEVING TIME SAVING Good supply chain management can reduce both wastage and construction time. Savings can also be achieved through overlapping detailed design and construction stages, where the contractor controls the flow of necessary information, and where the contract allows the contractor freedom in the choice of subcontractors and substitutions. Real savings in overall project time comes through effective management, and not by taking shortcuts like premature rushed starts. •

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TIME: HOW TO ASSESS

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Q. Is there time for a full brief to be systematically developed, so that the client’s detailed requirements can be properly reflected in the tender documents? 

Comment: this will be essential for those tendering who need full information when submitting a lump sum price. Anything less could bring the uncertainty of remeasurement. However, in the event of rapid action being required, say in the case of restoring damaged premises, a hand-to-mouth a pproach might be unavoidable. Q. Does the client have heavy rental or other financial commitments which mean that the earliest date for  completion is likely to be an overriding objective? 

Comment: as above this might be an overriding consideration which justifies the earliest possi ble start, and accepting the probability of some uneconomic working.

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Q. Are there any commercial or other external pressures whi ch make it imperative

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to complete by a certain date? 

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Comment: the need to catch seasonal trade for instance, or to be completed in time for a major event which is already programmed and immovable, such as the Olympic Games. In such a case a guaranteed completion date might be needed despite the contractor pricing for the risk. Q. Is phased or sectional completion necessary? 

Comment: for example, to allow some office units to be occupied, or parts of an industrial complex to be commissioned, ahead of completion of the whole contract. Not all contracts will allow for this, and to be effective it needs to be included in the contract conditions as a programmed requirement. Q. Is it desirable to phase possession by the contractor and limit it to successive parts of redevelopment of  the Works, in order that business can continue during the building work? 

Comment: during redevelopment within a site, is it essential to control phasing and also to accommodate some decanting of occupants and processes during site work? Is it necessary to restrict operations to certain times of day or intermittent periods? Many standard building contracts appear to assume exclusive possession by the contractor, and with small domestic projects in particular this is not practical and some

PROCUREMENT METHODS  –

the 'traditional' approach;

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the 'design and build' approach;

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the 'construction management' approach;

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the 'management contracting' approach;

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the 'turnkey' approach; and

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the 'partnering' approach.

TRADITIONAL APPROACH •

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The appointed architect or engineer (or a project manager, if appointed) will normally also fill the role of  the contract administrator. The contract administrator normally acts as the agent of t he client, provides the design, and supervis es the construction of that design to ensure the works are completed economically and efficiently.

TRADITIONAL APPROACH (2)

TRADITIONAL APPROACH (3)

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Advantages

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familiarity among contractors and consultants - the roles and responsibilities are well understood;

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the client retains responsibility for and control of design team;

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there is direct reporting by the design team to the client to ensure that quality control is maintained;

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the client has an independent professional in the role of contract administrator monitoring the project;

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there is certainty of price (if the work is fully desig ned in advance);

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priced Bills of Quantities provide a bas is for variations to be priced at tendered rates; as all prices are based on the same information:  –

there is no need for a contractor to build in a risk premium;

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it is easier to analyse the prices;

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the lowest price is usually the best value for money;

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where elements of the building are not fully designed, provisional sums may be used to allow for the later design of  those elements.

Disadvantages

to be effective, it requires the scheme to be more or less fully designed before tenders are sought - this often results in an extended pre-tender period; the fragmented design and construction process and responsibility can lead to disputes, for example in respect of whether construction defects are really design defects or whether they are constructio n defects;

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there is the potential for over-design and/or over-engineering;

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the contractor is not involved in the design process and therefore is not required to 'buy in' to the design;

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the client retains responsibility for the design team performance;

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a fixed lump sum price is rarely actually achievable;

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a contractor may price the work to win the job rather than providing a price that properly reflects the work to be carried out. This can encourage a claims culture if the s ubmitted price was too low because of 

TRADITIONAL APPROACH (4)

TRADITIONAL APPROACH (5) • •

Watchpoints A traditional lump sum approach requires the production of a full set of  documents before tenders are invited. Adequate time must be allowed for this.

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The traditional procurement method assumes that design will be by appointed consultants, and it does not generally imply that the contractor has any design obligations. If this is to be the case, for example with specialist sub-contract work or performance specified work, express terms should be included in the contract.

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Because the client appoints consultants to advise on all matters of design, and cost, he thereby retains control over the design and quality required.

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There is certainty of cost, to the extent that a lump sum is known before work begins, even if it has to be adjusted during the construction period as provided for in the contract.

The 'design and build' approach •

The 'design and build' procurement approach is used where the contractor is to be responsible for undertaking both the design and the construction of the required work in return for a lump sum price

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DESIGN & BUILD (2) These variants can be grouped under three main categories: •

Package deal or turnkey contract (dealt with in more detail below).

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Design and build contracts.

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Contractor's design for specific elements only

DESIGN AND BUILD (3)

DESIGN & BUILD (2) ADVANTAGES Speed of delivery from concept to completed building. Single point responsibility. Acceptance of design. Novation of design. Cost certainty. There is less client management/consultant involvement required post contract, and this therefore results in lower management costs and lower consultants' fees; Unless a contract states otherwise, the law implies a duty of fitness for purposes on a design and build contractor. • • • • • •

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DESIGN AND BUILD (3) •

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The initial price may be higher as the contractor may build into his price a 'risk premium'; Post-contract variations can be more expensive, The client has less control and influence over design matters; Inflexibility. There may be a conflict between the client's requirements and the contractor's proposals unless both documents are carefully checked. Design quality There is the potential of dual loyalties of a novated architect. The question of the quality achieved can be an issue because of the lack of control that the client has over the architect. The architect acts for the contractor not for the client; The lack of independence of the architect.

DESIGN AND BUILD (4) •

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In the most straightforward of design and build contracts, in theory there is usually a single point of responsibility. The client lacks control over detailed aspects of design; however, this might be acceptable where the broad lines of the scheme are satisfactory and the detail relatively less important.

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Construction work can be started early as a great deal of detailed design work can proceed in parallel. It is mainly the contractor, however, who benefits from the operational flexibility.

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Responsibility for completing on time rests wholly with the contractor. There is greater certainty of cost, even to the extent that, if required, responsibility for investigating site and sub-soil conditions can be made entirely the contractor’s. Any significant changes in the client’s requirements will affect the Contract Sum however, an d are likely to prove costly. Often the client requires that the contractor appoints the client’s consultants to develop the design under a consultant swit ch agreement or by novation. If this is not the case, it is always advisable to ask for information about who the contractor intends using as designer. Adequate professional indemnity insurance should always be a requirement. The client should appoint consultants to advise on the preparation of the requirements, and it is important that adequate time is allowed for these to be properly prepared. The requirements might include specific items, or even provisional sums, but generally it is prudent to prescribe performance criteria, so that a high degree of reliance is placed on the contractor. In the absence of any stipulations to the contrary, the contractor’s design obligations are absolute. However, they are usual ly reduced in standard forms of contract to those of the professional’s duty of using reasonable skill and care. Valuation of changes by the client is entirely the responsibility of the contractor, and the client has no quantity surveyor to intervene on his behalf. It is often difficult to evaluate design and build tenders objectively where both schemes and prices are submitted. Tenderers should be informed of the criteria to be used, and whether price is likely to be the prime consideration. Benefits can arise from designers and estimators having to work closely together. The contractor’s awareness of current marke t conditions and delivery times can ensure that a contract runs smoothly, economically and expeditiously. The client’s agent or representative should be selected with great care. He or she can be a key member of the Employer’s organisation, a professional consultant, a project manager or, depending on the nature of the work, a clerk of works. The extent to which an agent is empowered to act for the client needs to be clearly established.

MANAGEMENT CONTRACTING •

Management contracting is an approach where the management contractor undertakes to manage the carrying out of the work through works contractors, and those works contractors are contractually accountable to the management contractor.

MANAGEMENT CONTRACTING (2) •

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Advantages of the 'management contracting' procurement It is particularly beneficial for fast-track complex projects where minimal design information is available at the start of the project; It allows for early 'buildability' and programming input from the management contractor acting as a consultant; There is a single point contractual and payment arrangement for the client with the management contractor (rather than to all of the individual works contractors); The preliminaries and management fee can be fixed, therefore allowing for a degree of certainty on price; The quality can be controlled by the design team; There is great scope for client changes.

MANAGEMENT CONTRACTING (3) •

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Some of the disadvantages of the 'management contracting' procurement approach are as follows: This procurement approach is a low risk strategy for the management contractor as he/she has little responsibility for package contractor defaults, bankruptcy, etc.; Although guaranteed maximum price can be achieved, the process is still fundamentally prime cost in its nature which is an approach that many contractors naturally prefer; Cost increases can be substantial, and there is often a tendency for the initial cost plan to be adjusted upwards.

MANAGEMENT CONTRACTING (4)

MANAGEMENT CONTRACTING (5) •

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Management procurement methods are best suited to large, complex, fast-moving projects where early completion is desirable. This method of procurement depends upon a high degree of confidence and trust. There is unlikely to be a guarantee of firm contract price before the work actually starts on site, and the decision to go ahead usually has to be taken on the basis of an estimate on project information. The management contractor/construction manager acts for the client, and should therefore put the client’s interests first throughout the job. It is essential to appoint the management contractor/construction manager at an early stage, so that his knowledge and expertise are available to the design team throughout the crucial preconstruction period. Much of the detailed design work can be left to proceed in parallel with the site operations for some work packages, thus reducing the time needed before the project starts on site. Indeed, a great deal of detailed design will need to be left to specialist sub-contractors or suppliers. The client has a considerable degree of flexibility on design matters. The design can be adjusted as construction proceeds, without sacrificing cost control. However, coordination of design work for components or elements can be difficult, with an attendant risk of costly abortive work. Specialist contractors can be selected and appointed and materials on long delivery ordered in good time without any of the uncertainties and complexities which attend traditional nomination procedures. Although the project proceeds on the basis of a contract cost plan only, effective cost control is still possible with the help of an independent quantity surveyor.

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The construction management procurement approach is a method whereby the construction manager (often a contractor or someone with sound project manager skills) undertakes to manage the carrying out of the work through trade contractors. Although the trade contracts are arranged and administered by the construction manager, contractually they are the client's risk, and the client forms direct contractual relationships with the trade contractors.

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Advantages Some of the advantages of the 'construction management' procurement approach are as follows: The client is more in control of the process through the employment of the construction manager and the direct contracts with the trade contractors. The client has better cost and budgetary control, and there is a higher degree of control due to the project being broken down into trade packages; There is a fully integrated design and construction process; The construction manager acts on the client's behalf whereas a traditional contractor primarily acts in its own interests; The process is very flexible, and therefore changes to suit the client's requirements are relatively easy to accommodate; There is a reduced potential for claims. Disadvantages Some of the disadvantages of the 'construction management' procurement approach are as follows: The project needs to be sufficiently large or complex to be cost effective; The process requires the client to have mechanisms for entering into direct contracts with trade contractors and for making monthly payments to many individual contractors; The client needs to have the necessary experience and internal management ability to operate this procurement process; The client retains the contract risk of non-performance of the trade contractors; The client retains responsibility for the design team performance

CONSTRUCTION MANAGEMENT (3)