Contract Procurement Strategy

Contents

Aims

Learning outcomes

1. Introduction

2. Selecting the team

3. Procurement paths 3.1 Traditional path 3.2 Design and build path 3.3 Management path 3.4 Design and manage path 3.5 Project management

4. Partnering 4.1 The partnering process 4.2 Reaching agreement 4.3 Partnering contracting arrangements 4.4 Summary

5. Selecting the path 5.1 Client needs and wants 5.2 When to use what approach

6. Special contracts 6.1 Term contracts 6.2 Call-off contracts

7. Procurement of professional services

The College of Estate Management 2006

Paper 0260V10-0

Contract procurement strategy

Contract procurement strategy Paper 0260 Page 2

Aims This paper aims to:

z Explain the methods available for contract procurement.

z Review the use and application of standard forms of contract.

Learning outcomes After studying this paper, you should be able to:

z Describe an acceptable process for selecting the project team.

z Describe the three primary project procurement paths and discuss their advantages and disadvantages.

z Explain and comment upon the partnering approach.

z Explain the process of selecting an acceptable project procurement path, discuss the factors which should be taken into account, and explain the relationship between information, risk and control.

z Discuss the special conditions which apply to term contracts and the like.

This paper provides a broad overview of the major factors influencing construction procurement and contracting strategy.


1 Introduction The clients first consideration is to select consultants for the project team.

His prior knowledge and experience of contracting will influence him in the initial contact with a consultant and how the team is established. The first section of this paper looks at the latest code of practice published by the Construction Industry Board, which is promoted for use by all clients.

Though procurement decisions, contractual arrangements and tendering procedures are closely interrelated (every project needs a version of each); they involve different considerations and may be linked in almost any combination. Some combinations are more natural and appropriate in certain circumstances than others.

In advising the client on the path he should adopt, decisions are usually made in the following order:

z Identify the project brief, clarify the objectives, understand what the client expects in terms of needs (things the project must deliver) and wants (things which are not essential but which it would be nice to have), and prioritise them.

z Decide the procurement approach and overall contractual arrangement.

z Consider what type of contractual relationship is most appropriate (eg supplier/customer or some more collaborative arrangement).

z Decide the tendering procedure.

z Select the form of contract.

In the following sections we investigate the factors that influence these decisions.

2 Selecting the team Selection of the most appropriate team of consultants and contractors is plainly a most important process in achieving project success and must be undertaken with great care. In many cases the lead consultant, often a project manager, and architect or engineer will be chosen on the basis of previous experience or personal recommendation, but in the public sector it is becoming common practice for selection to be made on the basis of some kind of competition. Choice will be based on a range of criteria, including the type, scale, degree of innovation and time frame required for the project, the clients range of experience and expertise, and the skills available in the local market-place. Recent years have seen the emergence of specialist procurement advisers whose role is to guide the inexperienced or nave client through the initial process. Note also that, for public sector projects let by countries within the European Union, the EU procurement regulations will apply if the anticipated value of the services provided exceed a pre-set threshold value. These threshold values are set in Euros and are reassessed from time to time. UK Sterling equivalents are published annually by the Treasury, and current values may be found on the UK Government web-site. When EU procedures apply, projects must be advertised in the Official Journal of the European Union following the defined procedures, and some form of pre-qualification process will generally be required in order to select a manageable tender list from the firms expressing an initial interest.


Following the publication of the Latham Report, Constructing the Team (1994), the government set up working parties to develop the recommendations and produce new codes of practice for use by the industry. The Construction Industry Board was established as the body responsible for implementing the new codes of practice. The publication from working group 1, Briefing the Team, gives guidance to clients on how better to brief their consultants. Figure 1 shows an overview of the activities fundamental to a successful project. The lower section of the chart highlights the key outputs that represent the developing brief. As can be seen, obtaining professional advice early is recommended. However, good quality advice includes giving the client the correct options to appraise. Professional advice should cover the most appropriate working arrangement, including the consultants required to form the team. The publication from working group 4, Code of Practice for Selecting Consultants for the Team, looks at balancing the quality of the service offered with the price being charged. The quality/price mechanism for selecting consultants is described in detail, along with a recommended procedure to follow. A brief summary of the Code of Practice follows. An example of a completed tender assessment sheet is shown in Figures 2 and 3. Note that, particularly when a collaborative procurement approach such as partnering is envisaged, an assessment of the cultural fit between the employer and the contractor may also be incorporated into the selection process. Cultural fit is defined in this context as the extent to which the consultants value systems, business ethics, business processes and methods of working match those of the client. These aspects, together with an assessment of factors such as how well the team proposed by the consultant will fit together with the clients existing team, will be fundamentally important in achieving overall project success, and may count for as much as 30% of the overall quality score.

Contract procurem

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FIGU

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1 Briefing the team


Extract from Code of Practice for Selecting Consultants for the Team

z The quality/price mechanism should be established by a formally constituted and fully accountable tender board before tenders are invited and all tender documentation should be designed to ensure that appropriate responses are received to which the mechanism can be applied.

z A quality/price ratio must be agreed at the outset, representing the percentage weightings to be given to quality and price. The more complex the project, and the greater the degree of innovation and flexibility likely to be required from the consultants, the higher the ratio should be. Indicative ratios suggested for various types of project are:

z Quality criteria should be grouped under four main headings and weighted. Recommended headings and suggested weighting ranges are:

z A quality threshold needs to be established (eg 65 out of 100). Tenders must achieve this minimum quality score before final interviews are held and prices considered.

z Submitted tenders are assessed for quality by marking each of the four quality criteria out of 100, multiplying each mark by the respective weighting percentage and then adding them together to give a total quality score out of 100.

z Consultants passing the quality threshold (ideally only two to three) are then interviewed, their quality scores are reviewed and their prices are examined and marked. The lowest compliant bid scores 100 and others score 100 minus the percentage figure above the lowest price (eg a bid 25 percent above the lowest scores 75).

z The final quality/price assessment is achieved by multiplying the quality and price scores by the respective weightings set by the quality/price ratio and adding them together to give total score out of 100 (eg if the quality/price ratio is set at 70/30, the quality score is 80 and the price score is 75, the total score is 80 70% + 75 30% = 78.5). The highest scoring consultant should be awarded the contract.

Type of project Indicative quality/price ratio Feasibility studies and investigations 85/15 Innovative projects 80/20 Complex projects 70/30 Straightforward projects 50/50 Repeat projects 20/80

Quality criteria Suggested weighting range Practice or company 2030% Project organisation 1525% Key project personnel 3040% Project execution 2030%


FIGURE 2 Example of a completed tender assessment sheet

FIGURE 3 Example of a tender assessment comparison sheet


3 Procurement paths In 1996 the RICS published The Procurement Guide, to provide both clients and their advisers with a code of procedure to help them in selecting an appropriate procurement strategy for a building project. The guide is intended to be used as a prompt and focus for the issues to be addressed during the development of the procurement strategy. This section identifies the different strategies and their advantages and disadvantages. The strategy should be developed from an objective assessment of the clients needs and project characteristics. A best-fit solution is looked for, with an informed client making the decision based on sound judgement, giving due regard to the identified criteria and the acceptable distribution of risk. Figure 4, taken from The Procurement Guide, shows the activities in the procurement process. Depending on the procurement path chosen, the clients role may be taken over by a project sponsor or project manager. For public clients there are other publications available published by the Office of Government Commerce (OGC). There are four main procurement paths used in the construction industry, each having its own variations: traditional, design and build, management, and design and manage.

3.1 Traditional path In summary, the client or appointed design and cost control consultants prepare the tender documents, and then a main contractor is appointed. This is the traditional architect-led competitive tendering approach which has evolved over the past 150 years. It is a tried and tested route, with separate consultants working within long-established procedures. In most contracts let by this path, the contractor obtains the work by competitive tender and carries it out for an agreed lump sum. Sometimes the contractor is appointed by negotiation, ie without competition, though an element of competition may be incorporated in the early stages if a two-stage process is adopted. The use of standard project documentation is essential to the smooth functioning of this approach. This includes standard forms of contract, methods of measurement and co-ordinated project information. According to the RICS annual survey of construction contracts, the Traditional route is the most commonly used path. However, it does need adequate time for all procedures if the project is to be successfully completed.


FIGURE 4 Activities in the procurement process


There are two methods in the traditional path:

1. Sequential method. Contractors receive complete (or nearly complete) information from consultants on which to base their tenders. The successful contractor then proceeds with the construction of the contract.

2. Accelerated method. The contractor becomes part of the design team by tendering (either in competition or by negotiation) on partially complete information. In this instance, the successful contractor assists the design team with the completion of the design etc, and then gets on with the construction process.

One significant problem with the accelerated route is that it is extremely difficult for the contractor to give a lump sum price on partially complete information. Projects of this type are therefore most often let on the basis of some form of cost reimbursement contract, frequently incorporating a pre-set target with the contractors tender limited to a percentage addition for profit and overheads with perhaps a schedule of rates. It is also common to let contracts of this type on a partnering basis with provisions for incentive payments and pain share. When time is important, the accelerated traditional system provides a possible answer. It is most likely to be successful if a project office is created in which the whole project team works together. Otherwise the need for speed will prevent the professions and the contractor from having the time to make well-considered inputs in the right sequence. There are three basic types of contract used under the traditional route:

1. Lump sum contracts. The contract sum is determined before construction starts and the amount is entered into the agreement.

2. Measurement contracts. The contract sum is accurately known only on completion and after re-measurement to some agreed basis.

3. Cost reimbursement contracts . The contract sum is arrived at on the basis of the actual costs of labour, plant and materials, to which is added a fee to cover overheads and profit.

Under a lump sum contract, the contractor undertakes to carry out a defined amount of work in return for an agreed sum. This can be a fixed sum but is more usually a firm price, where variations in cost are allowed only for changes in taxes etc and changes in cost due to variation of work. Longer contracts, usually those of more than two years, may be let on a fluctuating price, in which the contractor is also reimbursed for any additional costs in the price of labour, materials and plant arising from inflation after the date of tender. Lump sum contracts with quantities are based on drawings and firm bills of quantities, and provisional items are kept to a minimum. Contracts without quantities are usually based on drawings and a specification together with a schedule of work described in much less detail than a bill of quantities. Measurement contracts are used where the work cannot be accurately measured before tendering takes place. The presumption is that the work has been substantially designed and that a reasonably accurate picture can be given via drawings and an approximate bill of quantities. Another alternative is the drawing and specification route, though this is little used for measurement contracts. However, remember that the basis of this type of contract is a total re-measurement of the work undertaken, which will then be priced at the relevant prices contained in the tender document.


Cost reimbursement contracts are often referred to as cost-plus contracts. The contractor agrees to carry out the work on the basis that he is paid the prime or actual cost of labour, plant and materials. In addition, he receives an agreed fee to cover management, overheads and profit. The fee can be paid in a number of ways:

z Cost plus a percentage fee, where the fee charged is directly related to the prime cost.

z Cost plus fixed fee, where the actual fee to be charged is agreed at the outset and is part of the tender on which the contractor is judged.

z Cost plus fluctuating fee, where the fee fluctuates in relation to the success of the project. If the cost is higher than originally anticipated, the fee is reduced; if the cost is less, the fee is increased (target cost).

Advantages of the traditional approach

z Completion of design prior to tender provides good time and cost control.

z Involvement of the designer throughout the construction process gives good quality control.

z Well established and familiar to all everyone knows how it works.

z Extensive provision for client changes and well defined processes for the evaluation of variations.

Disadvantages of the traditional approach

z Can be long-winded. The process is very sequential and efforts to reduce the overall time frame by tendering on incomplete data tend to lead to an increased risk of higher prices and time over-runs.

z Divided responsibility for design and construction may lead to post-contract disputes over defects.

z Limited opportunity for the contractor to input skills and ideas on constructability issues during the design phase, thus enhancing overall value for money. May be improved through use of the accelerated route, but this then poses other difficulties as described above.

3.2 Design and build path In summary, the employer makes his requirements known directly to one organisation which both designs and carries out the work. The design and build organisation may be chosen by tender, or may be selected for negotiation. In some cases the design and build organisation may also provide the site and finance the operations on a lease-back system. The main advantage claimed for this integrated approach to design and construction is that it results in a design which is better suited to the contractors construction method, giving lower production costs and a shorter contract period. It also allows the optimisation of design and production costs. The method of selecting an organisation varies according to whether it is a highly standardised system or a bespoke design.


There are three main variations used:

1. Single entity. A firm is appointed at the outset to design and construct the project, probably after some preliminary appraisal but without competition.

2. Competitive. Project documents are produced outlining the clients requirements. Several firms (three to five) may be asked to submit designs and prices, allowing the client a choice in design, price and completion date.

For larger projects it would be wasteful of both resources and time for each firm to produce detailed designs at the early stage of the selection process. In such cases the procedure could be in two stages: first, selecting a suitable firm based on outline design/specification details and price, and second, producing an acceptable scheme with the chosen firm.

3. Develop and construct. Similar to the competitive system, except that a partial or outline design is developed separately, usually through a separate architectural consultancy contract, and each firm tenders on that information. They are then required to develop the outline design into a complete scheme. This method allows the employer to develop the initial design with the aid of a consultant designer, thus helping the client to develop confidence in his scheme, before inviting construction companies to become involved.

Performance The two most significant factors affecting the success of a design and build project are:

z The clients brief (Statement of Employers Requirements). It is essential that the clients requirements are identified and stated clearly in the tender documents. These requirements may be detailed, leaving little scope for variation by the competing firms, or broad, leaving maximum scope for development by the firms and allowing maximum buildability. The brief should also include a statement of how the Employer will measure the success of the completed scheme, and of how the tenders will be assessed.

z Quality control/assurance procedures (QA). If the clients requirements are broad, it may be best to define them in performance terms. Overall performance may depend on good QA procedures. These should be identified in the brief and cover all stages of the process including design, manufacture and production.

The more the defined requirements can be expressed in terms which are capable of being quantified, the more likely is the success of the project.

Design responsibility When both design and construction are provided as a total service, there is an implied warranty of suitability for the required purpose of the work, as long as this purpose is properly known to the provider. This warranty, commonly known as a fitness for purpose obligation, exists absolutely and independently of any fault likely to give rise to liability in negligence. Note the difference in liability between this and the traditional approach, where an architect is required only to exercise due skill and care in the design, and the contractor is simply responsible for building the works in accordance with the specified designs and specifications.


Note, however, that some standard form contracts, for example the JCT Design and Build contract and the Intermediate Building Contract with Contractors Design, reduce the fitness for purpose liability to that of exercising reasonable care. In the absence of special terms in the employers requirements sufficient to import higher liability, it becomes a liability in negligence. Note also, however, that in the case of the JCT forms even special terms in the Statement of Employers Requirements will not be sufficient, since JCT design and build contracts all include a clause stating that nothing contained in the other documents shall override or modify the standard conditions of contract. Even so, in that form, and usually elsewhere, it is provided for the contractor to be given the right to object to variations required by the employer if they are likely to impinge upon this warranty. Similarly, the contractor normally reserves the right to vary the works for the purpose of suitability or safety. However, there should be attendant safeguards for the employer. In this connection there should be an agreed basis for pricing variations required by the employer and an appropriate system for interim payments.

Tender assessment Since competing firms often produce different design solutions and may use different materials, it is not always easy to choose the best tender. Tenders will generally be judged on some combination of factors such as price, time, quality standards, functionality and aesthetics. Ideally the tender assessment mechanism should be set out in the Statement of Employers Requirements. Note that where the EU Procurement Rules apply, the phrase most economically advantageous tender is no longer considered sufficient. The client usually appoints an internal representative or independent consultant to advise on this and generally look after his interests throughout the project.

Advantages of the design and build path

z Speed of construction z Single point of responsibility z Specialisation and know-how z Certainty of cost z Continuity z Improved communications.

Disadvantages of the design and build path

z Not so good where high quality design is required. It has been said that design and build contracts build down to a price not up to a quality.

z Lack of independent advice to client

z Quality control in hands of contractor

z Cost of variations.

A design and build contract in which the building is completed and furnished ready for immediate occupation by the client is often termed a turnkey contract.


3.3 Management path The terms project management and management contract tend to be used in different senses by different writers. In these papers:

z Project management is taken to mean management of the whole project from inception to completion, usually by a consultant professional acting as the clients representative. Project management is not, of itself, considered to be a separate procurement path. Rather, it is a technique to maximise the efficient management of projects which can be used with virtually any procurement path. See also Section 3.5.

z Management contract (or management fee contract) is taken to mean the more limited activity of managing the site process, though this normally also involves an advisory function during the design process.

z Construction management contract is a contract where management of the construction process is undertaken by a consultant construction manager.

Construction management contract The construction manager is appointed on a fee basis by the Employer. The construction works are subdivided into a series of separate work packages (either elementally, eg foundations, structural frame, external cladding etc, or by trades) and the role of the construction manager is then to plan and schedule the works and to co-ordinate the various work package contractors. The construction manager is therefore responsible to the client for timely completion of the contract.

Construction management is not widely used in the UK, but is widely used in other parts of the world, principally the USA, where it is well established as a separate professional discipline. It also has much in common with the traditional French lots separ approach where a pilt is appointed to co-ordinate and control the work of many separate trade contractors.

Management contract/Management fee contract In summary, the contractor is appointed on a fee basis, the object being to integrate the management expertise of the contractor with the clients professional consultants to provide a co-ordinated approach to design and construction. So, although the contractor is an active participant in the construction process and is responsible for co-ordinating construction operations, he does not directly undertake the role of either designer or contractor. His function is purely that of managing the contract work, which is divided into packages and sublet to approved contractors usually selected on a competitive basis. The following is typical of the sort of management contracting service offered by contractors:

z The contractor is involved in the scheme from its conception. He works closely with the client and his design team in formulating the contract objectives and producing a master programme for the whole period of design and construction.

z During the design stage the contractor advises the design team on such matters as the buildability of the design, materials availability, industrial relations, quality control procedures, and any other matters concerning the contract and its administration.

z In conjunction with the cost analysts and other members of the design team, the managing contractor presents a comprehensive cost plan to the client for his agreement.


z In consultation with the design team, the managing contractor arranges for the appointment of approved subcontractors to carry out the work, which is co-ordinated and monitored against the master programme to ensure that the necessary rate of progress is being maintained. His building team also ensures that the work is carried out in accordance with the design specification and quality control procedures.

z In conjunction with the clients representative, the managing contractor establishes procedures for the financial administration of the contract and keeps the client fully informed of the current cost position.

This sort of service solves the long-standing problem of how to involve the contractor in a meaningful way from the outset of a project. It is claimed that, as the contractor is working on an agreed fee basis, the clients interests will be put first and he will receive the full benefit of the contractors management expertise. Moreover, because the management contractor is involved in the project from its inception, the design, tendering and construction periods overlap, resulting in savings in cost and time.

It is possible to have a number of contract arrangements under management contracts. Either the subcontractors will contract with the managing contractor (Management Contracting), or the client will have direct contracts with all the subcontractors (Construction Management).

Differences between construction management and management contracting The principal difference between the two approaches lies in the structure of the contractual relationships. Figure 5(a) shows the construction management approach; Figure 5(b) shows the management contracting approach.

FIGURE 5(a) Construction management

FIGURE 5(b) Management contracting


3.4 Design and manage path This route attempts to combine characteristics of the design and build and management paths.

In summary, the client appoints a single firm to design the project and manage the construction work, but specialist contractors are appointed to carry out the work. The contractual relationships are therefore as shown in Figure 6.

3.5 Project management All these procurement paths involve the client to some extent in dealing with planners, local authorities, consultants, contractors and many other bodies. This can be very demanding and time-consuming, and clients frequently wish to pass on these problems to someone else.

Project management is not a procurement path, but is another layer of management that is sometimes necessary, particularly on larger and more complex projects.

The decision to use a project manager must come from the client. Where the client is a large organisation with little in-house construction knowledge, the project manager acts as its agent, dealing with the contractor and all the construction consultants. This gives a single point of contact for the team and the client. The project manager is responsible for co-ordinating the team and liaising with the contractor, but is not usually responsible for managing the site construction process.

The development of land and structures is a complex process, made all the more so by changing technology, unstable economic conditions and new legislation. It is attractive to certain clients, therefore, to think in terms of appointing one person to supervise the entire planning and construction operation from acquisition of the site to final completion of the development. Such a person would in effect step into the clients shoes and assume overall responsibility for the management and control of the project from inception to completion.

The oldest form of this service is probably the traditional architect managing all phases of the design and construction on what is called a several trades basis. That is, the subcontractors contract directly with the employer and the architect assumes the co-ordinating functions of the main contractor. Increasingly, large contractors offer this sort of service, and consultancy companies similar to those found in the USA are becoming more common in Europe (see also the management contracting, construction management, and design and manage approaches discussed earlier).

FIGURE 6 Design and manage


Project managers may be drawn from many professional disciplines, and may work in many other areas in addition to construction. Consequently the services offered in this field vary a good deal according to the circumstances, but they generally include the following:

1. Preliminary assessment of the clients needs and advice on the suitability of the site.

2. Preparation of the brief, in conjunction with the client, and the pre-contract programme.

3. Advising on the appointment of consultants architect, engineers, quantity surveyors and establishment of an information system for communications, instructions, reporting back, etc.

4. Obtaining planning approval and other consents.

5. Monitoring the design and cost in conjunction with the architect and quantity surveyor and approving the final designs.

6. Advising on selection of contractor, and the form of contract to use.

7. Overseeing the progress of the contract, including monitoring variations, cash flow and approving the final designs.

8. Chairing meetings of the design team and attending site meetings.

9. Close liaison with the client throughout, taking further instructions and translating them into co-ordinated instructions for the design and construction teams.

10. Control of the handover of the building and advice on such matters as insurance, defects and maintenance.

11. Where appropriate, disposing of the completed investment or co-ordinating the letting or sales programme, and advising on the form of lease to suit the clients requirements.

It will be seen that the service is essentially one of co-ordinating the efforts of others and does not involve carrying out construction or any of the primary functions of the established professions. An architect and/or engineer and others would be appointed to carry out the design, and a quantity surveyor would be appointed to carry out economic appraisals, quantification and financial accounting functions. However, as this type of service is so variable, it is important that the project managers terms of reference, and his authority, should be firmly established from the outset of the project. The evolution of project management as a professional discipline has, however, tended to result in a wide range of services being offered and required by clients, and many projects do not in fact require the full range of project management services set out above. The project managers service agreement should therefore list the specific duties to be undertaken. The fee charged may be a lump sum or a percentage of the building cost (usually 12 percent depending on the extent of the services). It is also necessary for the project manager to take out a professional indemnity insurance policy to cover his liabilities. Figure 7 illustrates the co-ordinating functions of the project manager.


It is important to note that whilst project managers are expert in managing projects, they are rarely expert in the employers business. This has led some large corporate clients to develop the model shown in Figure 8.

In this model the project sponsor is drawn from the employers organisation, and is responsible for specifying and delivering the project on behalf of the client. He therefore co-ordinates and controls all of the client input to the process. The construction project manager is responsible for delivery of the project to the project sponsor, and therefore co-ordinates and controls the construction process. This arrangement can work very well in practice, but requires very close collaboration between sponsor and project manager.

FIGURE 7 Co-ordinating functions of the project manager

FIGURE 8 Project sponsor/project manager (bow-tie model)


4 Partnering The term partnering became fashionable in the UK in the 1990s, but the concept of collaborative procurement, where employer and contractor work together to achieve mutually agreed and complementary aims, has much earlier origins. In high risk ventures such as international oil exploration, concepts of alliancing have a substantial history; in the UK the long-running arrangement between Bovis and Marks and Spencer for the construction of retail facilities during the 1970s was an early example of the partnering approach. Partnering should not be regarded as a procurement system, for two reasons:

z First, it is not strictly a procurement system at all. It is a philosophy which can be used in conjunction with most procurement systems. It is a culture, a mental attitude.

z Second, the principle of you scratch my back and Ill scratch yours is not new. Two partners helping each other for mutual benefit, instead of each one trying to gain the most at the others expense, has to be the way forward for any civilised business environment. This was identified (not for the first time in a government-sponsored report) in Sir Michael Lathams report Constructing the Team (1994).

Partnering should not therefore be regarded as a temporary phenomenon, currently in fashion, that will eventually fall out of favour. It should be considered as a way forward for success in the construction and development industry.

What exactly is partnering? According to the guide Trusting the Team, produced by the Reading Construction Forum:

Partnering is a management approach used by two or more organisations to achieve specific business objectives by maximising the effectiveness of each participants resources. The approach is based on mutual objectives, an agreed method of problem resolution and an active search for continuous measurable improvements. Partnering can be based on a single project (project partnering) but greater benefits are available when it is based on a long-term commitment (strategic partnering or alliancing).

The potential benefits to the client of successful partnering therefore are:

z Better value for money z At least the same level of quality z Less confrontation and therefore speedier delivery z Less risk, greater certainty of satisfaction z Fewer claims z Less bureaucracy z Better communications, understanding and tolerance of problems z Faster construction z Continuous improvement.

And the benefits to the contractor:

z Increased profit potential z Less confrontation z Greater certainty of workload z Better communications and understanding from clients


z Less bureaucracy z More involvement in key decision-making z Greater potential for profit z No competitive tendering process, therefore reduced overheads z Reliable flow of design information.

4.1 The partnering process The prime objective of a partnering approach is to achieve a project completion in which both parties are satisfied with the result the so-called winwin scenario. The process is shown in diagrammatic form in Figure 9. The process begins with a selection process to establish that all potential partners are suitable in terms of past experience, financial stability, management of resources (human, plant and equipment), competence, and attitude. Successful partnering requires that client and contractor work together in a spirit of mutual trust and co-operation for the good of the project. This is almost the complete opposite of the more common confrontational approach, in which contractor and client each tend to look solely to maximising their own advantage. An open and co-operative attitude is therefore vital for the project to succeed. It may also help if the contractor has had partnering experience before. Above all, it is particularly important that the key executives of the two organisations not only have a common desire to work together but are able to put this desire into practice. Initially it may be necessary to invite a selection of contractors to submit tenders and attend carefully planned interviews. A client with an on-going programme of construction works may start with the project partnering approach, hoping that, if successful, it may lead to strategic partnering. A number of contractors have now made partnering and strategic alliances of one form or another key features of their business, both at the employer/contractor level and at the contractor/subcontractor level. The contractors tendering for the partnering agreement may be asked to submit details of:

z Past experience z Human resources z Equipment resources z Financial resources z Procedures for dealing with suppliers and subcontractors z Rates and overhead allowances z Profits.


4.2 Reaching agreement Where projects are let in competition, the basic ground rules such as:

z form of contract z method of payment z incentive mechanisms, retention and liquidated damages

will be proposed by the employer prior to tender. For negotiated projects these terms will be part of the negotiation process. Other issues may, however, be left for discussion post-tender, and it is common to seek tenderers views on the employers proposals as set out above as part of their tender submission. Issues considered post-tender would typically include:

z Processes for risk management z Final details of incentive/pain share arrangements z Open book accounting processes z Dispute resolution procedures z Contract management communication and partnering processes, etc.

In addition, it is common for the parties to familiarise their agreement to the agreed mutual objectives and methods of working in a Project Charter.

FIGURE 9 The project partnering process

(Source: Trusting the Team, Reading Construction Forum, University of Reading)


4.3 Partnering contracting arrangements Partnering contracts Considerable attention has been paid in recent years to the form which contractual arrangements ought to take under a partnering contract, and some early proponents of partnering initially proposed that the collaborative nature of the process meant that there would no longer be any need for traditional standard forms of construction contract. Sir John Egan, in his 1996 report Rethinking Construction, commented that:

Effective partnering does not rest on contracts. Contracts can add significantly to the cost of a project and often add no value to the client. If the relationship between the constructor and the employer is soundly based and the parties recognise their mutual interdependence then formal contract documents should gradually become obsolete.

Whilst the dangers of having no formal documentation at all quickly became self-evident, there has been something of a revolution in the way forms of contract designed to support partnering arrangements have been structured and drafted. In general the language used has been more logical and more flexible, and some standard contracts have been greatly simplified by stripping out many of the administrative processes.

A point by point analysis of the major forms of contract for partnering in use in the UK may be viewed at: www.cem.ac.uk/bboard/studymat/P0260V10-0linkcontent.doc

Supply chain management Considerable emphasis has been placed on the need for efficient management of the whole construction production supply chain.

Usually this is done by the main contractor, involving co-ordination and arrangement of many subcontractor and supplier organisations. Historically the supply chain management practices of contractors have been generally poor, with many complaints over the years from subcontractors alleging unfair and unscrupulous treatment by main contractors. Many of these issues were addressed directly in the UK by the Construction Act, and both the Latham and Egan reviews highlighted better supply chain management as one of the keys to improved efficiency in construction.

Construction contractors are therefore being urged to apply partnering concepts to their own supply chains, to form strategic long-term alliances with key trading partners, and to encourage the spread of such practices down to the very bottom of the supply chain. This process is being actively encouraged by some clients who expect increasingly to have a voice in the supply chain management process.

Of course successful partnering also requires that clients practise good management of their own organisation (often described as the demand chain). This is plainly most important where the client is a complex corporate body with many inputs to the project process (sometimes called the multi-headed client). Public sector clients generally fit this pattern, as do most large private sector corporations (see also the bow-tie model presented in section 3.5, Figure 8). In these cases the demand chain will normally include not only internal functions such as finance, legal services and facilities management, but also end users all of whom rightly should be represented, together with the client department, in the project process.

Management of this demand chain is frequently problematic, and again attention is drawn to the project sponsors role set out earlier. However, this may still present the contractor with considerable commercial risk, particularly in the case of inexperienced clients. He is being asked to take on trust the fact that the client will indeed behave in a truly partnering way. The client has ample opportunity to investigate and interview the contractor, but the reverse is rarely the case.


It is perhaps for this reason that in some specialist areas, such as social housing, some contractors specialising in partnering contracts have attempted to extend their management influence to encompass not only their own supply chain but the demand chain as well. They have therefore developed subtle and usually covert processes to incorporate the client body into their own partnering model, thus allowing them much better control of the overall process.

Prime contracting Prime contracting is the methodology adopted by UK Defence Estates to address the partnering/strategic alliance/supply chain management problem. In essence, Defence Estates have established a small group of strategic partners (prime contractors) to carry out all their work. Projects are let on a design and build basis, and prime contractors are responsible for managing the entire supply chain required to satisfy the clients needs, taking complete responsibility for all aspects of the project and carrying the majority of the risk, including a fitness-for-purpose obligation.

Projects are placed using a new purpose-written form of contract and are let on a target cost guaranteed maximum price basis. Individual projects are subject to competition among a number of prime contractors in order to meet the requirements of the EU procurement rules.

4.4 Summary Partnering is not a panacea for resolving all contractual problems and should not be seen as such, otherwise both parties will be disappointed.

Nonetheless, partnering is the UK Governments preferred choice for larger and more complex projects, and is now widely used in the public sector both for building works (education projects, social housing refurbishment, defence projects) and for civil engineering. It has also been used successfully by a number of large private sector organisations as diverse as MacDonalds and the British Airports Authority, and is widely used in the USA, Australia and elsewhere. It is not, however, the automatic panacea for all ills.

Some problems that can occur include:

z Key personalities fall out, resulting in acrimony.

z Client begins to wonder if he is paying too much because of the non-competitive pricing.

z Reducing the risk may affect the competitiveness of the contractor or his ability to innovate.

z The contractor becomes too comfortable and reliant upon too few clients.

z The client expects too much, and so becomes disillusioned.

z The arrangement fails owing to a lack of understanding by one partner of the other partners business.

Neither should it be thought that partnering presents the best answer for all clients all the time. For an experienced client who knows the industry well, or for simpler projects involving little innovation and few risks, the traditional supplier/customer arrangement may prove to be the best value option. Partnering should simply be considered as another valuable tool in the procurement specialists tool-kit to be used when it is likely to be most effective.

It has been argued that the ideal procurement system to accompany the partnering culture is construction management (see Trusting the Team report). However, as Figure 10 shows, it may be successfully used with other systems too.


5 Selecting the path The procurement selection process requires the exercise of considerable professional judgment, but may be broken down into a number of key stages as follows.

5.1 Client needs and wants Client needs and wants, of course, will vary from client to client and project to project. However, the following list of issues represents a useful check-list perhaps only the relative importance will vary.

z Time (elapsed time and practicability) z Quality (aesthetic and physical) z Cost (capital and/or whole life cost predictability) z Single-point responsibility

FIGURE 10 Procurement through partnering

(Source: Trusting the Team)

Stage 1: Identify and analyse the clients requirements. Distinguish needs (ie things the project must deliver) from wants (ie things which are not essential but which it would be nice to have). Identify initial project key performance indicators (KPIs).

Stage 2: On the basis of the analysis, select the most appropriate overall strategy

(see section 5.2). Stage 3: On the basis of the analysis of client needs and the features of the project,

decide whether the most appropriate form of relationship is supplier/customer or some form of collaboration.

Stage 4: Select or develop an appropriate form of contract to match the decisions

already made. Stage 5: On the basis of all of the above, design and develop a contractor selection

methodology which will offer the client the best possible chance of project success.


z Flexibility (likelihood of changes, degree of innovation, etc) z Contractor input z Client definition of value for money z Commercial risk (allocation and management).

This list is not exhaustive but provides a useful starting point.

The most important issues are generally time, quality and cost. All procurement paths discussed earlier can provide satisfactory performance in these areas, but of course provide a different emphasis and different levels of risk and control for clients.

Note the need for compromise. Most nave clients will seek the cheapest possible building of the highest possible quality in the shortest possible time. These demands are mutually incompatible, and it is part of the procurement advisers job to broker an acceptable, and achievable, compromise. Its in no-ones interest for the procurement adviser to give in to client pressure to achieve the unachievable.

Note, however, that for many high profile projects political problems may cloud the decision. Some buildings now acknowledged as modern classics would never have been built had the true cost been recognised from the start. Historical examples include the Sydney Opera House and the HSBC headquarters in Hong Kong, both of which considerably exceeded their initial budgets. It is easy to see such buildings as failures of the procurement process, but perhaps the fact that they were constructed at all is a triumph of politics. Perhaps in years to come the new Scottish Parliament Building in Edinburgh will be seen in the same light.

5.2 When to use what approach Risk/certainty of time, quality and cost will largely govern selection of the approach.

z The faster the programme needs to be from inception to completion, the less detailed will be the pre-contract documentation provided by the client and his consultants, and the less certain will be the eventual cost at contract stage.

z The more certain the eventual cost needs to be at contract stage, the more detailed will be the pre-contract documentation provided by the client and his consultants, and the slower will be the pre-contract programme.

z The less certain the existing conditions are on site, the less certain will be the eventual cost at contract stage, and, if it is a detailed or complicated conversion or alteration project, the more likely it will need to be run under a non-traditional contract such as a management contract.

z In general, the greater the degree of innovation, the greater the risk that the project will not be completed on time or within budget.

The advantages and disadvantages of the various procurement paths have already been considered in section 3.

There are, however, always trade-offs to be made between innovation, fast construction, early start on site and cost. Clients therefore need to consider the importance they place on each issue. There is also a trade-off to be made between the information available, the degree of control required by the client and the risk involved, as shown in Figure 11.


Figure 12 shows a pro-forma developed by R M Skitmore and D E Marsden and published in their paper, Which Procurement System? Towards a Universal Procurement Selection Technique. The table shows typical weightings derived from their research findings to show the relative importance of the various factors. Utility values are assigned to each by the client on a scale of 1 to 5 to reflect the degree of importance of each factor in a specific project at that particular point in time. Note that although the use of matrices like this can give a useful guide, many modern practitioners would contend that the results obtained from such mechanistic processes need to be verified by more subjective approaches in other words, a reality check.

It is important to make a correct decision in the early stages of the project. The path chosen will affect the roles and relationships of all personnel involved with the project and is a crucial strategic decision in producing an acceptable end product.

In recent years attempts have been made to produce computer programs to help in deciding which path to choose. One such system (ELSIE) identifies a range of issues which are considered necessary in choosing the appropriate route, and poses questions to be answered by the user.

Factors used include:

z Time: site acquisition, to start of construction and completion of project.

z Design: contractors involvement, type of design and project, quality of brief, amount of services.

z Size of project.

z Price risk acceptable.

Once answers to these questions are known, the computer will suggest a procurement path.

This type of work is still being developed and the initial program was limited to office buildings. However, a similar approach can be followed in deciding which path to select without the use of a computer.


FIGURE 11 Trade-off between information, risk and control


FIGURE 12 Strengths and weaknesses of procurement systems


5.3 Relationships Once the decision on the most appropriate procurement route has been made, it is necessary to examine the form of the relationship between employer and contractor. Many of the issues here have already been considered in section 4. However, it is important to note that, even if partnering or similar appears to be the best option, before moving away from the more traditional supplier/customer relationship the procurement adviser must be convinced that the employer either already has the necessary skills, knowledge and business and time in place or is at least prepared to commit to the partnering ideals and implement a training programme. Many partnering projects have failed because employers as well as contractors have simply paid lip-service to the idea without making the necessary shifts in organisational and personal attitudes, culture and behaviour. Experience shows that changing deep-seated organisational and personal beliefs is extremely difficult, and it may not be possible to implement a partnering project with a client who, in all other business dealings, is accustomed to operating in a competitive, confrontational way. The procurement adviser must therefore think very carefully and balance the possible idealistic gains of a collaborative relationship with reality. This decision may have significant impacts upon other parts of the procurement process. A good example would be a project involving considerable innovation in design or constructional technique, which may be subject to client change during construction and is to be built within a restricted budget and final time-frame. The best form of relationship would obviously be a collaborative one, with jointly agreed dispute resolution processes and a joint commitment to complete the building to everyones satisfaction. However, if the client were unable or unwilling to commit to such a philosophy, then the commercial risks involved for both contractor and client would be greatly increased, and much closer attention would need to be paid in the design of the procurement process to the management of them.

5.4 Completing the process The remaining parts of the process comprise selection of an appropriate contractual mechanism and selection of an appropriate contractor. There are many standard forms of contract to choose from, and the key issue is to choose one in which the philosophy, contractual language and procedures match the procurement strategy. Some notes on partnering contracts were given in section 4.3. Selection of the most appropriate contractor is also plainly a key issue, but a detailed discussion is beyond the scope of this paper.


6 Special contracts 6.1 Term contracts Term contracts are normally used where regular maintenance and repair work or minor improvement work is required. Rather than enter into separate contracts for every piece of work, it is often better to appoint one contractor to carry out all the work during a specified period.

The types of term contract can include:

z Measured. The work is measured after completion and the contractor paid in accordance with a schedule of rates. The schedule is often pre-priced, with the contractor tendering a percentage mark-up or mark-down.

z Daywork. The contractor is paid the cost of labour and materials for the job plus a tendered percentage to cover overheads, profit etc, or contractors may be required to tender all-in hourly labour rates.

z Service (or Specialist). The contractor is paid a tendered price per visit or per operation, or even for a predetermined service for the whole term.

In order to obtain competitive rates, tenderers need to be informed of the type of work involved, the place or places of work, and the duration of the contract.

Term contracts differ from lump sum contracts in that it is not possible to define the extent of the work or establish a contract sum at the tender stage. It is usual to give an approximate total value of work per annum within the documents. Provision can also be made for priority orders and a stipulated response time can be given in the documents.

The main advantages claimed for term contracts include:

z Lower prices quoted by contractors in view of the continuity of work.

z Saving in time and overheads compared with a series of single job contracts.

z A long-term relationship resulting from the contractor becoming familiar with the requirements and needs of owners.

z Potential for computer application.

z The contractor can establish an efficient rapid response team.

The disadvantages are:

z Reliance on a single contractor.

z A minimum workload may need to be established.

z The client can be over-reliant on the ease of the system, resulting in inadequate pre-planning and excessive costs.

In long-term contracts there will be a clause allowing either party to terminate the contract on giving written notice.

6.2 Call-off contracts Call-off contracts, sometimes termed framework agreements or framework contracts, can be used where the provision of a service or a certain type of repetitive work is anticipated but cannot be fully specified at the time of making the arrangement.


For such contracts to be effective, it is necessary to define all the terms of the agreement clearly, including the scope of the work, payment provisions, and a comprehensive list of prices and locations of the work.

Like term contracts, call-off contracts are specified to cover a period of time, perhaps with an option to extend after agreement of price fluctuation or a price fluctuation clause could be incorporated into the original agreement.

Serial contracting This is a form of standing offer in which a contractor undertakes to enter into a series of lump sum contracts in accordance with the terms and conditions set out in the initial offer.

The offer usually relates to a firm programme of specific jobs of a similar nature and construction and planned for execution within a stipulated time. The prices in the offer may be presented in the form of a notional bill of quantities, prepared to provide a competitive base for selecting the contractor and subsequently negotiating tenders.

The standing offer is usually taken up in a letter of intent, which should make clear that the number of contracts let within the framework of the offer will depend upon satisfactory performance by the contractor, and that the individual offers must be acceptable to the client in respect of quantity, quality, cost and completion on time.

The system offers an incentive to firms to maintain a high standard of workmanship and co-operation. It produces time savings by eliminating lengthy pre-contract procedures for each project in a programme. It also enables skilled production gangs to be kept together, which aids productivity.

Continuation contracts These are similar to serial contracts. They are used to place further contracts based on the terms of an existing contract in order to obtain the benefits arising from continuity of work. Continuation contracts are therefore negotiated on the basis of the original contract.

However, such ad-hoc arrangements are less likely to produce all the benefits to be gained from the forward planning and early knowledge of the intended load obtained in true serial contracting. Where they relate to the same site as the original contract, they may be referred to as extension contracts. The object is usually to take advantage of an established site organisation and/or to avoid the practical difficulties of having two contractors working on the same site concurrently.


7 Procurement of professional services Historically it was unusual for the appointment of consultants to involve any form of competition; indeed, the professional Institutions (eg RICS, RIBA) positively discouraged such practices. Byelaw 24 of the RICS Members Regulations, for example, stated that:

No member shall, with the object of securing instructions or supplanting another member of the surveying profession, knowingly attempt to compete on the basis of fees and commissions.

Appointments were therefore conventionally made on the basis of the level of service provided, and commissions were most commonly placed on the basis of past experience or recommendation from trusted sources. In recent years, however, pressures on both the public and the private sectors have led to a significant shift in this philosophy.

Quantity surveying services are in many ways typical. Here change came in the UK public sector from two primary sources:

z The introduction of Compulsory Competitive Tendering (CCT) legislation for public sector works and services in the early 1980s. This required consultants to bid for work in the same way as contractors. There was an implicit assumption in the CCT regime that, provided the work was well specified and firms were carefully screened before being included on tender lists, then the lowest price quoted must be accepted.

z A 1977 Monopolies and Mergers Commission enquiry into scales of fees for surveying services. This led the RICS, in 1983, to revise the purpose of the fee scales, from their previous mandatory status to providing guidance. Consequent amendments to the Members Regulations released surveyors from the obligations outlined above.

The most common early approach to competition was to require tendering consultants to quote a percentage reduction from the existing fee scales, but later approaches also included a requirement to quote fixed lump sum fees for particular parcels of work.

Public sector practice soon led to private sector clients seeking similar arrangements.

Following the introduction of the CCT Regulations, it was alleged that quantity surveyors fees dropped by up to 60 percent as firms competed ever more fiercely for shrinking volumes of work in an increasingly competitive market. Some of this reduction was accounted for by improved working methods, increasing computerisation and better practice management, but some clients began to express concern that service levels were falling: quantity surveyors began to pay much closer attention to providing only the basic core services for which they were being paid, whilst making extra charges for non-core services which had previously been provided as part of the service under the previous fee scale arrangements.

The UK public sector landscape shifted again in 1999 when the Government introduced its new Best Value legislation as a replacement for CCT. The Best Value approach stressed maximisation of value for money in public services rather than lowest cost and, in common with other elements of public works, consultancy services began to be procured on the basis of both price and qualitative factors rather than on price alone. As with construction work, the relative weightings allocated to price and non-price factors vary according to the type and scale of the project, and the degree of specialisation implicit in the services required.


SELF-ASSESSMENT QUESTIONS

1. Review the major procurement options in the context of risk to the employer and the contractor.

2. Explain the mechanism which could be used to select the best submission for a project to be let on a design and build basis.

3. Explain the major advantages and disadvantages of partnering compared to a more traditional approach to construction contracting.

4. Explain the difference between the design and build, design and manage, and develop and construct approaches to construction procurement, and list the strengths and weaknesses of each.

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