Types of Procurements in Malaysia
Law of contract...
TYPES OF PROCUREMENTS IN MALAYSIA
According to Ashworth, (1990), a procurement system can be defined as something related to the obligation, type of contract, rights and liabilities of the parties involved between consultants, clients and contractors itself. Therefore, it is very crucial to wisely consider all factors when choosing the type of procurement to be used before the project started since different type of procurement systems will give a different effects on cost, quality and time of the project. To ensure a smooth project performance, a wise selection of the procurement is needed since the rapidly changes and demands of the industry will directly influence the productivity of the whole industry. Therefore, there are various kind of types of procurement in the industry such as :
1) Design and build
Based on the Marwa A. (2004), the design and build type of procurement is widely used since it can offer numerous kind of advantages to the project. In this type of procurement, the contractor of the project is the person who takes a responsibility to design and build the project according to the employer’s requirements. Therefore, the employer has the benefit of only one side to deal and to be blame if things go wrong with the construction. In the other way round, the client will automatically lacks of control over those detailed aspects of design, yet, instead of that this might be acceptable due to the satisfactory broad lines of the scheme offered.
Basically, according to the Shapiro (2003), the concept of design and build construction contract involves a group of three-party arrangement between an owner, contractor and the design professional. A design professional is hired to design the structure and thus, the contractor will construct the project according to the design plans and specifications. By doing so, the owner warrants the sufficiency of the plans and assumes and liability for the defects to the responsible contractor. The contractor will be in charged for defective construction and workmanship, yet is free from any liability for defective construction of the project. It is kind of hard to evaluate and measure the design and build tenders objectively where both schemes of design and prices are submitted. The criteria to be used should be informed to the tenderers so that they know whether the price is most likely to be in the consideration or not.
In addition, one of the main benefits of the design and build procurement method is that the probability of the owner to contract with a single entity. By any means, the design and build team is responsible in providing the owner regarding to all aspects needed including facility, starting from the point of designing services to the construction, and including equipment selection and procurement (Beard et al.2001). By using this method, the risks regarding to the management of the design and control are being transferred to the design and build entity. Plus, in that way, the owner will eventually relies on the design and build team for coordination, schedule monitoring, quality and cost control. Therefore, to conclude above that, the design and build type of procurement emerged to the satisfaction of the owner’s recent requirements to complete the projects faster within the lower costs (Tulacz 2003).
This type of procurement is suitable to be used when the building is simple rather than complex and it not highly serviced which do not need a technical innovation into it. Plus, by overlapping the design and the construction activities, the programme can be accelerated.
2) Lump Sum
Lump sum is the contract where the sum of the expenditure of the project is determined before the construction starts, and the amount is stated in the agreement (Davis, 2008). The contractor of the project is responsible in carrying out the defined amount of money stated in the agreement in return for an agreed sum. The amount of money can be fixed not subject to recalculation, in which there would be no chance for the employer to make changers. The sum is most likely to be subject to limited fluctuations, usually to cover tax changes for unforeseen at the time of tendering process. This kind of contract include quantities are priced on the basis of drawings and a firm bill of quantities. Those without quantities are priced on the basis of drawings and another document. Lump sum is the total of the priced item which described as a satisfactory ‘Schedule of Works’.
There are sort kind of advantages of lump sum which is the owner will know the final price of the certain construction before the work commences. Besides that, the contractor will has more incentive to reduce his cost to increase the profit income. Therefore, the faster the contractor completed the project, the least the cost of overhead and the maximum profit will be gain.
Lump sum is suitable to be used when the construction allows a sufficient time of progression works and the client wishes to appoint the contractors and designers separately where the consultant design is warranted.
3) Management Contracting Procurement
According to Davis (2008), in this type of procurement, an independent professional team and a management contractor are appointed by the client. They will be as an adviser to the team during the pre-construction stages and they will take the responsibilities in executing the works using direct works contracts for the later on construction. It is possible to make an early start on-site and achieve early completion by using this type of contract since it allows the client to change the design during the construction. In addition to that, the drawings and detailing can be adjusted and can be finalised as the progressing work. To make sure the management contract to be successful, a trust and a good teamwork element should grow on the part of the client, contractor and the design consultants itself. The roles of the contractor in this type of procurement is they can give advise and opinion on the design programme, tender action, construction progression and also the delivery of goods and materials. A written submission which includes a proposed management fee will usually written by the management contractor. Those fees include the total management service as a percentage of the total cost of the project and for a service to cover preconstruction stages. The work on the basis of a contract cost plan which had been prepared by a quantity surveyor, project drawings, and a project specification will be undertaken by the management contractor. Eventually, the clients accept most of the risks due to there is no certainty about the costs and programme.
4) Construction Management Procurement In this construction management type of procurement, just after a careful selection process, the management contractor is chosen and a management fee will be paid to the contractor (Davis, 2008). The work contracts is arranged and administered by the management contractor is in direct between the client and contractor. In a sense of that, it will give the client a greater measure of control. By any means, the client will accept a considerable amount of risk. The management contractor is basically an agent, and usually cannot guarantee that the project will be finished on time.
There are some advantages of using construction management procurement which is increased competition for construction work on large project and reduced confrontation between the design teams and the team responsible for the supervising the construction. Besides that, by using this type of procurement, we don’t need to nominate the trade contractors and the public accountability. The construction management will ensure more even development of documentation. The main advantages of using a management approach of procurement are the client will only deals with one firm, which enables them to improve the coordination and collaboration between designers and constructors. Apart from that, the contractor can assume risk and responsibility for the integration of the design with construction under a design and manage form. Instead of those advantages, this type of procurement also has it disadvantages which is price certainty is not achieved until the final works package has been informed. The client also must provide a good quality brief to the design team as the client loses direct control of design quality which influenced by the contractors.
Both type of management procurement are suitable for large, complex, and fast moving projects where early completion is desirable. And most important thing is, this kind of procurement depends upon a high degree of confidence and trust between the parties involved.
5) Traditional Traditional procurement is required the main contractor to generate a ‘lump sum’ tender, before the project starts. This tender is the contractor’s best estimate of the outturn costs of the project. If the contractor can reduce costs, then there is no incentive to share the savings with the client. So, their designers need to set performance standards and communicate the cost-saving potential and design actions upfront at the tender stage, so that bidders factor the potential savings into competitive tender prices to benefit financially from waste reduction and good waste management So, if the waste reduction is considered during design, more reuse of materials and higher recovery rates, then the tender should reflect lower out-turn costs in a competitive market. But this not happen by chance, and the client should require the design team to explore about the waste reduction opportunities, then inform all bidders (during the tender process) about the waste reduction potential, and also about the top opportunities identified, and also the resulting SWMP actions. The school appoints a design team which they were work up a scheme, and then submit it for planning approval and compile it. This is issued to a contractors who then reply with their tender price that based on the tender documents. The project is then given to one of the tenderers and then a contract is set up, between them and the school. Normally, this contract is administered by the architect. Throughout the project, the design team are responsible to the school. This is not always the case. Simple sports halls are a excellent example of a straightforward design that normally have a limited lifespan.
6) Build Operate Transfer
Build operate transfer is a form of project financing, a
private entity receives
a concession from the public sector or private to finance, design, construct, and operate a facility that are stated in the concession contract. This can enables the project proponent to recover its own investment, operating and also maintenance expenses in the project. The fees are raised during the concession period due to the long-term arrangement. The rate of increase is often tied to a combination of external and internal variables, allowing the proponent to reach a satisfactory internal rate of return for its investment. Traditionally, the projects that provide for the infrastructure to be transferred to the government at the end of the concession period. In the infrastructure projects and in public–private partnership, BOT finds extensive application. Besides, in the BOT framework a third party, for example the public administration, delegates to a private sector to design and build infrastructure and also to operate and maintain the facilities for a certain period. The private party has the responsibility to raise the finance for the project during this period. And retain all revenues that are generated by the project and is the owner of the regarded facility. At the end of the concession agreement, the facility will be then transferred to the public administration without any remuneration of the private entity involved.
For this type of procurement, there are some types of the most common risks involved which are :
Technical risk : construction difficulties, for example breakdown of equipment, unforeseen soil conditions.
Political risk: especially in the developing countries. This is because of the possibility of political change.
Financing risk: market risk, income, foreign exchange rate risk and interest rate fluctuation
Comparison between types of procurement
Lump sum is one of the types of procurement which had been categorized into traditional type of procurement. It requires the production of a complete set of documents before tenders are invited. Lump sum assumes that the design will be appointed by the consultants, and the contractor does not have any responsibility in any design works. The client also cannot make changes of the design of work made by them. In the other way round, the design and build procurement is most likely make use of a single point of responsibility where the employer has the advantage of only one party to deal with and one party to blame of things go wrong. The client is required to accept the concept design at an early stage and often before the detailed designs is complete. In addition to that, if the client is wishing to make changes to the project scope, it might cost expensively. Whereas in the management type of procurement, the client is most likely tends to have a considerable degree of flexibility on design matter. They can adjust the design as the construction proceeds without even losing cost control. This would not be possible by using traditional methods.
Besides that, the lump sum can takes time process to produce the full contract of document. Thus, the overall project duration may takes a longer times compared to the other procurement methods due to the sequential strategy and the construction cannot be commenced prior to the completion of the design. And same goes to the management type of procurement where close time and information control is required. Yet, for the design and build type of procurement, it gives an advantage into reducing the overlap design and construction and thus project time can be reduced off. Therefore, in term of time, the design and build type of procurement is the most reliable time taken to a project to be completed.
Apart from that, in term of cost, the design and build procurement is most likely tends to use of a guaranteed maximum price with a saving option thus can reduce the cost of the project construction. Instead of that, the management procurement is kind of having poor price certainty. The price certainty of the project is not achieved until the final works has been completed. But yet, the project proceeds on the basis of a contract cost plan, with an independent quantity surveyor is required in order to maintain an effective cost control. Whereas, the cost for the lump sum type of procurement depends on the client. Yet, the
contractor has more incentive to reduce his cost to increase the profit. The client have the right to choose how much they would like to spend on that certain project so that the contractor will make use of those money as agreed on the agreement. Thus, sometimes, the most affordable procurement is lump sum in which the amount of money depends on the client. But still, the design and build of contractor’s increased control over a project may result in lower overall costs. The contractor is able to order necessary materials for subsequent phases due to this type of procurement can be designed and constructed in phases.
1) Davis, P., Love, P., Baccarini D,. (2008) Report on Building Procurement Methods 2) Shapiro, B., (2003) Design and build / Turnkey Contracts – Pros and Cons 3) Mastura Jaafar, Nurhidayah M.R (University Sains Malaysia, Malaysia) ; Level of Satisfaction and Issue with Procurement Systems used in the Malaysian Public Sector. 4) Mastura Jaafar, Azlan R.N ( Quantity Surveying Department, School of Housing and Planning, University Sains Malaysia) ;
The Development of Public and Private
Construction Procurement Systems in the Malaysian Construction Industry 5) Walker,Smith, Adrian Charles (1995). Privatized infrastructure: the build operate transfer approach. Thomas Telford.