Annexure 13: Procurement strategy and tactics

Department of Higher Education and Training

UNIVERSITY MACRO-INFRASTRUCTURE FRAMEWORK (MIF)Infrastructure Management Guidelines for Universities

Procurement strategy and tacticsContents

1 Introduction 12 Framework for developing a procurement strategy 3

2.1 Introduction 32.2 Spend, organisational, market and stakeholder analysis 3

2.2.1 General considerations 42.2.2 Spend analysis 42.2.3 Organisational analysis 42.2.4 Market analysis 52.2.5 Stakeholder analysis 5

2.3 Primary and secondary objectives 52.4 Options for engaging the market for new or refurbished construction works 6

2.4.1 Concept 62.4.2 Financing of the project 62.4.3 Design and interface management responsibilities 82.4.4 Interface management responsibilities 8

2.5 Packaging strategy 92.5.1 Concept 92.5.2 Framework or non-framework agreements 92.5.3 Identifying work packages 10

2.6 Contracting strategy 112.6.1 Concept 112.6.2 Forms of contract 122.6.3 Pricing strategy 12

2.7 Decide on targeting strategy 142.7.1 Concept 142.7.2 Key performance indicators 142.7.3 Decide on selection method 17

3 Documenting a procurement strategy 174 Procurement tactics 18

4.1 Concept 184.2 Publicity 194.3 Procurement planning and sequencing 194.4 Setting up of procurement documents 20

4.4.1 General 204.4.2 Tactical variables associated with the process of offer and acceptance 204.4.2 Identification of a suitable standard form of contract 204.4.4 Specific conditions of contract 224.4.5 Approaches to achieve quality 226.4.6 Cost effective procurement 23

Annexure A: Delivery management concepts and practices 25Annexure B: Framework agreements 28Annexure C: Selecting a standard form of contract 37

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Framework for the development of procurement strategyand tactics

1 Introduction

Procurement is the process which creates, manages and fulfils contracts. Procurementcommences once a need for goods and services or any combination thereof has beenidentified and it ends when the goods are received and the services and construction worksare completed and contracts are closed out. Delivery management is the critical leadershiprole played by a knowledgeable client to specify, procure and deliver infrastructure projectsefficiently and effectively, resulting in value for money (see Annexure A). Delivery managementas such includes knowledgeable leadership, consistent governance and systematicadministration of procurement contracts and project finances.

Procurement yields the necessary resources to deliver projects while delivery managementprovides the oversight management and forms part of the governance or quality oversightarrangements of a network of suppliers including, as necessary, professional services,contractors and subcontractors to design, scope, detail and deliver infrastructure projects ona site.

There are a number of options relating to the manner in which client delivery managementoversight is provided as well as in the nature of the contracts that may be entered into (e.g.self-finance or market finance, framework agreements or non-framework agreements etc.), theallocation of design and interface responsibilities in construction contracts, pricing strategies,targeting strategies, selection methods and standard forms of contract for a particular type ofprocurement. Such choices impact upon procurement outcomes.

Procurement strategy is formulated around procurement objectives which may relate to eitherthe delivery of the product (primary objectives) or what can be promoted through the deliveryof the product (secondary objectives) i.e. broader societal objectives. Procurement strategy isalso informed by spend, organisational, market and stakeholder analyses.

Procurement tactics on the other hand typically relate to the selection of a contractor (the otherparty to a contract) who is most likely to deliver best value or a cost-effective solution throughthe performance of the contract. Such tactics also relate to the setting up of the terms andconditions of contracts to not only allocate specific risks between the parties to a contract butalso to incentivise performance to achieve best results.

This document provides a framework within which:

the approach to the market can be determined in satisfying a client’s need for new orrefurnished construction works;

a procurement strategy for one or more projects involving the acquisition of goods,services or construction works irrespective of complexity, size or duration can bedeveloped; and

the procurement tactics, which enable identified procurement strategies to be effectivelyimplemented, can be formulated.

This document is based on the following publications:

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Watermeyer, R. (2018) Client Guide for Improving Infrastructure Project Outcomes.School of Construction Economics and Management, University of the Witwatersrandand Engineers Against Poverty. ISBN 978-0-620-79293-6; and

BS 8534, Construction procurement policies, strategies and procedures – code ofpractice

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2 Framework for developing a procurement strategy

2.1 Introduction

A procurement strategy can be developed for a single project, a programme of projects or aportfolio of projects. It identifies the best way of achieving objectives and value for money forspeciifc contracts, whilst taking into account risks and constraints.

Different options in a procurement strategy carry different level of risk for the client. No oneoption is right for every project. For each situation, there will be advantages and disadvantagesin the use of any specific method. The client needs to carefully assess its particular projectrequirements, objectives and potential challenges and find the method that offers the bestopportunity for success and achieving its value proposition (promise of value to be delivered)for the project.

The framework as set out in Figure 1 enables choices to be made and aligned withprocurement objectives in the development of a procurement strategy. The application of theframework can rationalise the delivery of projects within a programme or portfolio of projectsand minimise the contractual realtionships which are entered into. This can be used to addresscapacity constraints in spending public sector budgets as it can be used to reduce the numberof contracts that need to be procured and managed and tap into the resources of the privatesector without compromising objectives.

Figure 1: Framework for the development of a procurement strategy

The application of the framework can also be applied in support of the delivery culture whichthe client wishes to persue in delivering the project e.g. long term collaborative relationship.

2.2 Spend, organisational, market and stakeholder analysis

Gather and analyseinformation

(conduct spend,organisational,

market andstakeholderanalyses)

Formulateprimary andsecondary

procurementobjectives

Package required workinto contracts or orderslinked to a framework

agreement

Determine contractingstrategy (identify form of

contract and pricingstrategy)

Decide on selectionmethod

Decide on targetingstrategy

Documentprocurement

strategy

Purchase completed constructionworks

Enter into a: Public Private Partnership design, build and operate

contract lease to own agreement lease agreement for existing

works

Procurementfor new or altered,

refurbished orrehabilitated construction

works?

yes

Market tofund acquisition(“buy” decision?

yes

no

no

Make “buy” or“make” decision

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2.2.1 General considerations

A spend, organisational, market and stakeholder analysis provides a backdrop against whichall decisions are made. Accordingly, such analysis should be in sufficient detail to enableinformed decisions to be made, based on identified strengths and weaknesses and theappetite for transferring or accepting risks. Such analysis should identify what internal skills,capabilities and resources are available or can be committed by the organisation to deliver theproject. Use of external expertise may be required.

2.2.2 Spend analysis

A spend analysis should be based on an infrastructure management plan, which for one ormore projects identifies and prioritises projects and packages against a forecasted budget andschedule, preferably over a period of at least three years. This involves, as relevant:

the clustering of needs in terms of types of output e.g. construct an office block, refurbisha school, rehabilitate a waste water treatment plant, etc.,

the categorising of clusters of projects in terms of commonality in relation to the attributessuch as:

˗ nature of work e.g. the construction, rehabilitation, refurbishment, alteration ormaintenance of buildings and or engineering works,

˗ type of service e.g. construction only, design, construct and operate, construct andmaintain etc.,

˗ unit value e.g. high, medium and low,˗ potential for standardisation e.g. high, medium and low,˗ one of a kind projects or repetitive projects,˗ time schedule urgency e.g. high, medium, low,˗ organisational and managerial complexity in terms of the number of managerial

interfaces or hierarchical layers either within an organisation or project structure orstakeholders to be managed e.g. high, medium, low, and

˗ technical complexity or level of innovation, e.g. high, medium or low,

the identifying of spatial locations of needs per clustered category,

the estimating of amounts to be spent per annum per clustered category (based oncurrent trends); and

identifying needs which may occur simultaneously on the same site or within a region.

The output of the spend analysis are spatially located projects within an infrastructuremanagement plan grouped into categories of spend with common attributes.

2.2.3 Organisational analysis

An organisational analysis involves the identification of the client’s organisational capacity andcapability as being limited, adequate or unlimited in respect of areas such as procurement,project management, design, construction and manufacturing.

The client’s appetite needs to be tested for issues such as increasing capacity, putting newcapabilities in place, assuming contractual risk, and transferring risk to other parties.

The output of the organisational analysis is a description of the client organisationalcharacteristics and appetites.

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2.2.4 Market analysis

A market analysis identifies at a macro level the available external capability and capacity asbeing limited, adequate or unlimited in respect of the various types of construction andprofessional services which may be required.

Subcontracting capabilities should also be considered and analysed.

The output of the organisational analysis are descriptions of the market characteristics.

2.2.5 Stakeholder analysis

Stakeholder expectations and interfaces should be identified as they need to be managedwithin the project or programme of projects by the client delivery management team.

A stakeholder analysis involves the identification and description of key project stakeholders.

2.3 Primary and secondary objectives

Procurement objectives are informed by the client’s values and value proposition for the projecti.e. the promise of measurable benefits resulting from the project. Procurement objectivesshould not be confused with objectives relating to the conceptualisation, planning, design,construction and maintenance of construction works.

The primary objectives relating to the delivery of goods or services or any combination thereofinclude:

tangible objectives including budget (cost of the project), schedule (time for completion),quality, and performance characteristics required from the completed projects and rateof delivery (how quickly portions of the works or a series of projects can be delivered orfunds can be expended);

environmental objectives;

health and safety objectives; and

intangible objectives including those relating to:

˗ buildability (the ease with which the designed works is constructed),˗ relationships (e.g. long term relationships to be developed over repeat projects,

early contractor involvement, integration of design and construction etc),˗ client involvement in the project,˗ end user satisfaction, and˗ maintenance and operational responsibilities.

Secondary objectives typically relate to the promotion of sustainable development objectivessuch as:

the alleviation and reduction of poverty through the provision of work opportunities to thevulnerable;

local economic development;

Cost

Quantumof delivery

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the establishment and strengthening of indigenous building materials and methods;

the promotion of construction technologies that increase employment;

the transfer or development of skills;

the minimisation of the harmful effects of development on the local environment; and

the promotion of increased use of environmentally sound goods, building materials andconstruction technologies.

Secondary procurement objectives may also relate to the redefining of business ownershippatterns, the composition of the workforce, the distribution of employment opportunities andwork opportunities for small and medium enterprises.

Secondary or developmental procurement objectives are additional to those associated withthe immediate objective of the procurement itself. Secondary procurement policy objectivesinfluence procurement strategies both directly and indirectly.

Primary objectives commonly relate to delivering the product whereas secondary procurementobjectives commonly relate to the delivery process. Competing primary and secondarypriorities need to be balanced. Trade-offs against priorities may be required.

2.4 Options for engaging the market for new or refurbished construction works

2.4.1 Concept

A client, where new or refurbished construction works is required, needs to answer basicquestions relating to (see Figure 2):

the financing or the project on a “buy” or “make” basis;

if the decision is to “make”, whether or not design responsibilities and / or responsibilitiesfor the management of interfaces between direct contracts are to be retained ortransferred.

This is an important decision as the choice to “buy” or “make” determines the number ofcontracts that need to be procured and overseen as well as the capacity and capabilities of theclient delivery management team which needs to be put in place to oversee the delivery. Italso informs the procurement strategies that are adopted.

2.4.2 Financing of the project

The source of funding might not be an option as it can be a matter of policy or regulation forany given client.

The financing of the project on a “buy” basis requires the market to pay for the acquisitionincrementally as the client pays only for completed work. Under this financing mechanism, thedeveloper typically carries the cost of providing the required construction works and commonlyreceives payment either in the form of a lump sum, a monthly amount for the term of thecontract or a percentage of the income stream following the completion of the project. Theoptions commonly available to the client where the market funds the acquisition are indicatedin Table 1.

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Figure 2: Common project delivery options for new or refurbished construction works

Table 1: Options where the client requires the market to fund the acquisition

Client requirements Options available to the client

Client requires ownership

Purchase completed construction worksEnter into a Public Private PartnershipEnter into a lease to own agreement

Contract on a design, build and operate basisClient does not requireownership Enter into a lease for construction works

The client’s involvement in the delivery management of a project where the market funds theproject is limited. In procurements of this kind, a client may need to appoint a transactionadvisor as the other party to the contract will oversee or has already overseen the delivery ofthe project. A client nevertheless needs to undertake a procurement process or negotiate acontract to acquire the outcomes associated with the selected option. Furthermore, clients willneed to source some professional capacity to ensure the quality of what they are procuring.

Client retains designresponsibilities

Design by client strategy

Client transfers designresponsibilities

Design and construct /develop and construct /

design and supplystrategy

Constructionmanagement strategy

Main contractor /management

contractor strategy

Client retains interfacemanagement responsibility

Interfacemanagement

betweencontracts

Client transfers interfacemanagement responsibility

Designresponsibility

Note: Clients appointtheir own personnel orcontract professionalservice providers toperform their allocateddesign and interfacemanagementresponsibilities in thedelivery process

Client requiresownership

Funding

Market funds theacquisition

(“buy” decision)

Client does not require ownership

Enter into a design, build andoperate contract

Client funds theacquisition

(“make” decision)

Enter into a lease to own

Enter into a lease for existingconstruction works

Enter into a Public PrivatePartnership

Purchase completedconstruction works

Need identified for new, orrefurbished construction works

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The financing of the project on a “make” basis, on the other hand, requires the client to directlypay all contractors for the goods and services associated with the delivery of the projectincrementally as the works proceeds. It also requires that the client play an active role in thedelivery of the project as indicated in Annexure A and to make decisions regarding theallocation of design and interface management responsibilities between the parties to aconstruction contract. A client needs to appoint professional service providers to undertakedesign and interface management responsibilities which it has retained, where it lacks in-house professional expertise to assume these responsibilities. Accordingly, decisions maderegarding responsibilities for design and interface management determines the nature andnumber of professional service agreements that are entered into.

2.4.3 Design and interface management responsibilities

A client can retain design responsibility, in which case the contractor undertakes constructionon the basis of production information issued by the client (design by client strategy).Alternatively, the client can assign design responsibility to the contractor in which case thecontractor:

designs the works based on requirements established by the client and constructs it(design and construct strategy) or provides a solution to the client’s requirements andmanufactures and installs the required works or component thereof (design and supplystrategy); or

completes the production information based on a scheme design provided by the clientand constructs it (develop and construct strategy).

In the design and construct and develop and construct strategy, the client nevertheless needsto have a capability in the first instance to develop the end of stage deliverables which formthe basis of the scope of work for a contractor who is assigned design responsibilities andthereafter for reviewing the outputs of the contractor for general conformity with the scope ofwork and what has been agreed at each stage following the appointment of a contractor. Aclient may in order to obtain continuity in aspects of the design novate professional serviceproviders to a contractor as a condition of contract e.g. mechanical design. (Novation is thesubstitution of a new contract in place of an old one or the substitution of one party for anotherparty in a contract.)

Table 2 indicates the appropriate usage of the design by client, develop and construct anddesign and construct strategies. The client is at risk for delays in production information in thedesign by client strategy. The attractiveness of the develop and construct and design andconstruct strategy is that there is single point accountability for design and construction whichovercomes fragmentation in design through integration. However, early contractor involvement(the practice of appointing a contractor before the design is complete) linked to a design byclient strategy, possibly though a framework agreement, also enables construction knowledge,experience and inputs to be obtained earlier than normal to reduce costs, before the price fordetailed design and construction is agreed. There are accordingly several options to achievedesign integration and minimise waste through collaboration between designers andconstructors.

2.4.4 Interface management responsibilities

A client can retain responsibility for managing interfaces between direct contracts in whichcase the client is responsible for the planning and managing of all post contract activities forwork packages which have dependencies due to interfaces (construction managementstrategy). Alternatively, a client can assign interface responsibilities to a contractor who will

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subcontract parts of the work (main contractor strategy) or most if not all the works to others(management contractor strategy).

Table 2: Appropriate use of strategies involving design responsibilities

Strategy Appropriate usage

Design byclient

Where one or more of the following applies: the client wishes to make significant technical inputs into the design process and design

details; the client requires flexibility in the development of the design; reasonable certainty in cost and time is required before a commitment to proceed to

construction is made; independent design advice is required; or the flow of outstanding production information after the formation of the contract can be tightly

managed

Develop andconstruct

Where: the client requires integrated detailed design and construction, based on the client’s design

development report, and single point accountability; standard designs exist which need to be made site specific; or the works need to be priced and commence before the production information has been

completed

Design andconstruct

Where the client requires: integrated design and construction and single point accountability; that most risks lie with the contractor in return for price certainty; or that the cost and completion date be agreed when a decision to proceed with the project is

made

2.5 Packaging strategy

2.5.1 Concept

Projects needs to be broken down into one or more work packages i.e. a deliverable or projectwork component or a group of tasks within a work breakdown structure. The work packagescan then be programmed, resourced and managed, and where necessary procured.Accordingly, a packaging strategy is the organisation of work packages into contracts or ordersissued in terms of a framework agreement over the term of such an agreement.

2.5.2 Framework or non-framework agreements

Framework agreements (see Annexure B) reduce the client’s need to re-advertise andapproach the market for work falling within the scope of the agreement over the term of theagreement and the number of relationships to be managed. They also provide client deliverymanagement teams with programming flexibility to manage expenditure relating to the deliveryof projects over time and enable collaborative relationships to develop in order to deliver bettervalue and project outcomes, including those relating to the promotion of secondaryprocurement objectives. They also provide an opportunity for contractors to improve theirinternal management systems, develop their supply chains and improve their performance indelivering projects including their attainment of secondary procurement goals, during the termof the contract, through continuity of work over a longer term than is the case in non-frameworkcontracts.

Framework agreements are appropriate where the available budgets and the detailed scopeof work is uncertain, the need for goods or services involves repetitive work of a similar nature

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over a period of time or a quick response time is required or long term relationships aredesirable to achieve efficiencies or desired project outcomes. They also are appropriate wherethe client wishes to foster collaborative relationships and wishes to move away from a deliverymodel based on a series of isolated, highly transactional relationships.

The number of packages within a project, programme of projects or a portfolio of projectsestablishes the number of contractual relationships which the client delivery management teamhave to put in place, oversee and administer. Accordingly, the packaging strategy determinesthe quantum of resources that a client requires to perform client delivery management teamfunctions.

2.5.3 Identifying work packages

The scope and nature of the work package determines the resources that are required. Thisin turn determines the capabilities and capacities of companies that are contracted to delivera work package. Accordingly, the packaging strategy has a significant impact on who isqualified to deliver the work package. Too big a work package can, for example, exclude smalllocal companies or even national companies from providing the goods, services or works ornecessitate that companies form joint ventures to deliver the package.

Projects should only be broken down into smaller contracts (unbundled) when there isadministrative capacity to administer the increased number of contracts or orders that resultfrom the unbundling of the project, management arrangements are in place to dealt with themanagement of interfaces between contracts, and the unbundling does not result in aninappropriate division of responsibilities, increased contractual risk, duplication ofestablishment charges and under-utilisation of resources. An alternative approach tounbundling is to require main contractors to ‘unpack’ their contracts into smaller contracts usingtargeted procurement procedures linked to key performance indicators such as thoseestablished in terms of SANS ISO 10845-5, SANS ISO 10845-6 or SANS ISO 10845-7. Suchprocedures require contractors to procure the services of smaller businesses to performportions of such contracts and to administer them and, in so doing, remove this burden fromclient. This approach can be used to secure local participation in contracts (see SANS ISO10845-1).

Work packages may be grouped together and combined or broken down into several sub-package when developing a packaging strategy. For example, work packages involving similaror different types of work may be grouped together and delivered through a single contract ororder issued in terms of a framework contract e.g. construction and maintenance work orbuildings and sportfields on a single site, design and construction services or architectural andengineering professional services.

The factors that inform the packaging of work packages into contracts and orders include:

the project delivery options that is decided upon;

interdependencies between projects and programmes;

opportunities for long term relationships for collaboration including the need for earlycontractor involvement;

avoidance of unincoporated joint ventures to perform contracts;

discipline specific professional services or multidisciplinary professional services withsingle point accountability;

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the need for long lead items which can delay projects if they are not sourced early in thedelivery cycle;

organisational and managerial complexities;

economy of scale;

mitigating of project risk;

risk allocations and risk appetite;

programming (scheduling) requirements;

attractiveness to markets;

matching contractor skills and capabilities;

commissioning requirements;

delivery management considerations e.g. capability and capacity to provide the requiredoversight management of projects which collectively deliver strategic objectives andrealise anticipated benefits;

management structure to provide effective leadership to projects;

capability or capacity of staff to procure and brief delivery teams, pay contractors,account for expenditure and manage interfaces between contracts; and

secondary procurement policy objectives e.g. participation of target groups and localeconomic development / content.

The sequencing of projects of a similar nature and the spatial location of projects can informdecisions regarding framework agreements where continuity of work is a consideration.

2.6 Contracting strategy

2.6.1 Concept

The fundamental exchange between a client and a contractor is the delivery of work inaccordance with stated requirements for a price. A contracting strategy is the strategy thatgoverns the nature of the relationship which the client wishes to foster with the contractor,which in turn determines the risks and responsibilities between the parties to the contract andthe methodology by which the contractor is to be paid.

Inherent risks can be transferred or accepted. In some instances, insurances can be taken outto cover risks e.g. as a hedge against adverse currency exchange rate fluctuations or to coverstorm damage to the works. The focus in the distribution of risk is, however, on the who isresponsible to settle or absorb the cost of the risk event should it materialise. The contractortries to limit liability in contracts to a foreseeable figure. The client needs to bear in mind thatincreasing the risk borne by the contractor inevitably increases the price of the contract.

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2.6.2 Forms of contract

Standard forms of contract provide fixed terms and conditions which are deemed to be agreedand are not normally subject to further negotiation or amendment following the receipt oftenders (see Annexure C). Such forms of contract usually include the method of payment andallocate risks to the parties and how the contractor is compensated for risks for which he is notat risk should they materialise.

The selection of a standard form of contract for a construction works related project is madeby the client, particularly where competitive tenders are called for. The scope and nature of theproject primarily affects the selection of the type of contract as indicated in Table 3.

Table 3: The scope and nature of different types of standard contracts

Type of contract Scope and nature of the project

Constructioncontract

Construct, alter, refurbish or rehabilitate construction works on a site including any level ofdesign responsibilityThe contractor is generally responsible for loss of or damage to the works from the timethat access is granted to provide the works until the works are completed and taken overby the client

Design, build andoperate contract Design, build and operate or maintain construction works over a defined period of time

Professionalservice contract

Provide construction works related services with the skill and care normally used byprofessionals providing services similar to the required services

Service contractManage and provide a construction works related service other than a professional serviceor maintain construction works and plant in an existing state, typically over a term, whichmay involve a modest amount of improvement through renewal and replacement

Supply contract Supply local and international construction works related goods and provide any associatedservices, if any, including design

The use of standard forms of contract assists in reducing both tendering and contractadministration costs. Bespoke or substantially amended standard forms of contract requiretenderers and clients alike to seek legal or specialist advice in preparing and interpreting suchdocuments. Such forms of contract can lead to risk pricing to cover uncertainties and increasethe risk of disputes arising from unfamiliar provisions. Accordingly, they should only be utilisedwhere they demonstrably provide greater value for money.

2.6.3 Pricing strategy

A pricing strategy is the strategy which is adopted to secure financial offers and to remuneratecontractors in terms of the contract. There are three types of pricing strategies, namely price-based, cost-based and performance based. The range of commonly encountered options areindicated in Table 4.

The pricing strategy determines who takes the risk for the differences between the actual pricespaid in terms of the contract and those estimated when the total of the prices for the works areagreed and how changes to the scope of work are assessed and paid for. The contractor is atrisk where payment is based on lump sums or activity schedules. The client is at risk wherethe contractor is paid on a cost plus basis. This risk is shared by both the client and thecontractor for other pricing strategies as indicated in Figure 3.

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Table 4: Common pricing strategy options

Early contractor involvement in construction contracts, with or without design responsibilities,can be achieved through the selection of a cost-based pricing strategy. For example, acontractor can be appointed on a target contract basis whereby the contractor can becontracted on the basis of their cost parameters and a target cost can be negotiated whenthere is sufficient production information available to agree a target cost. Escape clauses canbe inserted into design and construct contracts to enable the client to use the designs andapproach the open market in the event that agreement cannot be reached regarding the targetcost.

Pricing strategy Description

Price-based

Activity schedule Contract in which the contractor breaks the scope of work down into activities, which maybe required to be linked to a programme, method statements and resources, and priceseach activity as a lump sum, which he is paid on completion of the activity. The total ofthe activity prices is the lump sum price for the contract work

Bill of quantities(constructioncontract only)

Contract in which a bill of quantities lists the items of work and the estimated or measuredquantities and rates associated with each item to allow contractors to be paid, at regularintervals, an amount equal to the agreed rate for the work multiplied by the quantity ofwork actually completed(A bill of quantities is prepared in accordance with a standard system of measurement.The contractor is not a risk for increases in quantities and mistakes in compiling the billof quantities such as omissions, departures from the rules of measurement, ambiguitiesand inconsistencies)

Lump sum Contract in which a contractor is paid a lump sum to provide the works, goods or services.(Interim payments which reflect the progress made towards the completion of the works,goods or service may be made)

Price list or priceschedule

Contract in which a contractor is paid the price for each lump sum item in the price list orschedule that has been completed and, where a quantity is stated in the price list orschedule, an amount calculated by multiplying the quantity which the contractor hascompleted by the rate(Lump sum contract where the contractor is not at risk for increases where quantities arestated)

Cost-based

Cost reimbursable Contract in which the contractor is paid for his allowed costs plus a fee which includes hisprofit, and company overheads

Cost plus Contract in which the contractor is paid for his actual expenditure plus a percentage orother agreed sum which includes his profit and company overheads

Target cost Cost reimbursable contract in which a target price is estimated and on completion of theworks or services the difference between the target price and the actual cost isapportioned between the client and contractor on an agreed basis

Time based Contract in which the contractor is paid for his time expended at agreed staff rates whichinclude overheads and profit

Percentage of costof construction(professionalservices only)

Contract in which the contractor is paid a fee, based on a percentage of the cost of theworks or a portion thereof

Performance based

Performancemetrics

Contract in which payment is made against specific and measurable levels of operationalperformance as agreed

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Figure 3: The relationship between the client’s risk and flexibility to effect scope changes indifferent pricing strategies

Standard forms of contract can be drafted around significantly different objectives andprinciples. Such objectives range from those that are designed around specific contractingstrategies and don’t offer flexibility in the allocation of risks to those that cover the full range ofrisk allocations and pricing strategies and permit flexible allocations of risk. The selectedstandard form of contract needs to support the selected contracting strategy. If not, bespokecontracts or modifications to the standard forms of contract need to be drafted to enable theselected contracting and pricing strategy to be implemented (see Annexure C). Best practiceis, however, to use standard forms of contract with minimal project specific amendments whichdo not change their intended usage. Accordingly, it is preferable to use a suitable standardform of contract to implement the selected procurement strategy.

2.7 Decide on targeting strategy

2.7.1 Concept

A targeting strategy is a strategy used to promote secondary procurement objectives. Atargeted procurement procedure is the process used to create a demand for the goods orservices, or any combination thereof, from, or to secure the participation of, targetedenterprises and targeted labour in contracts in response to the objectives of a secondaryprocurement policy. There are a number of targeted procurement procedures which can beused to promote secondary procurement objectives as indicated in Table 5. SANS ISO 10845-1 provides comprehensive guidance on the application of targeted procurement procedures.

2.7.2 Key performance indicators

Key performance indicators (KPIs) in the form of quantitative or qualitative measures ofimpacts or changes that may be beneficial which relate directly to secondary procurementobjectives (desired results) need to be formulated. Such indicators need to be formulated insuch a manner that they are contractually enforceable. They need as such to be described inqualitative terms and to be linked to measurable and quantifiable targets and be provided witha means of verifying and auditing claims regarding performance in relation to the target. Figure4 provides a four level model for specifying KPIs relating to secondary procurement objectives,based on the provisions of SANS ISO 19208. A performance parameter in terms of this modelmay be regarded as a KPI.

Lump sum / Activity schedule

Bill of quantities

Price list / Price schedule

Target cost

Cost plusCost reimbursable /

time based

Client’s riskContractor’s incentive / risk

Clie

nt’s

flex

ibilit

y to

effe

ct c

hang

e

MinMax

MaxMin

Max

Min

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Table 5: Targeted procurement procedure options

Targeted procurementprocedure

Outline of procedure

Granting of tender evaluationpoints

Tender-evaluation points for contract-specific goals are granted totenderers who undertake to achieve a specified KPI in the performance ofthe contract

Accelerated rotations on electronicdatabases

Target groups are identified and accelerated at a faster rate than non-targetgroups on electronic data bases linked to the nominated procurementprocedure

Granting of a percentage of thetotal number of evaluation pointsused to short-list tenderersfollowing a call for expressions ofinterest

A point scoring system is used to shortlist respondents following a call forexpressions of interest in the qualified procedure, a percentage of the totalpoints on offer are linked to the attainment of KPIs.

Financial incentives for theattainment of key performanceindicators in the performance of thecontract

An incentive payment is linked to the improvement upon or attainment of aKPI in the execution of a contract

The creation of contractualobligations to engage targetgroups in the performance of thecontract by establishingrequirements for the tendering ofsubcontracts in terms of aspecified procedure orestablishing obligations to attaincontract participation goals inaccordance with the relevantprovisions of SANS ISO 10845.

Contractors can be required, as a contractual obligation, to subcontract apercentage of the work to targeted enterprises or contract goods orservices from targeted enterprises. They may also be required to enter intojoint ventures with targeted enterprises or engage targeted labour in theperformance of a contract. This can most readily be achieved by requiringcontractors to archive a minimum contract-participation goal in accordancewith the requirements of SANS ISO 10845-5, SANS ISO 10845-6, SANSISO 10845-7 or SANS ISO 10845-8Alternatively, contractors may be required to subcontract specific portionsof a contract to targeted enterprises

Figure 4: Four level model for the specifying of targets (KPIs) relating to secondary procurementobjectives

Table 6 illustrates the structure of a performance standard relating to the participation of target groupsin contracts as provided for in some of the parts of SANS ISO 10845. The objective (Level 1) of part 4,6, 7 and 8 of SANS ISO 10845 focuses on different aspects of the participation of target groups in a

By application of deemed-to satisfy rules, compliance with referenced standards orachieving or exceeding a stated performance indicator

Note: An attribute is a characteristic assessed in terms of whether it does or does not meet a given performance(performance is the impact on economic conditions, the environment, society or quality of life)

Level 1

Level 2

Level 3

Level 4 Evaluation of solution (framework for demonstration ofcompliance with performance requirements)

Performance parameters (a group of indicators used to evaluatethe performance of attributes)

Objectives (related to societal expectations)

Performance descriptions (performance demanded or expectedto be fulfilled by an attribute)

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contract. Clause 3 of each of these standards establishes qualitative (Level 2), quantitative (Level 3)requirements in relation to the objective (Level 1) and how credits towards the contract participation goalcan be obtained. The remainder of the clauses establish the means for verifying and auditing theattainment of the contract participation goals (key performance indicators).

Table 6: Performance framework for the engagement of target groups in contracts

Aspect ofperformance

Participation oftargetedenterprises incontracts

Participation oftargeted partners injoint ventures incontracts

Participation of localenterprises and labourin contracts

Participation oftargeted labourin contracts

Level 1:Objective

Provide businessopportunities tospecified targetedenterprises

Provide joint venturepartner opportunities tospecified target groups

Provide business andemploymentopportunities to localenterprises and targetedlabour

Provideemploymentopportunities tospecified targetedlabour

Level 2:Performancedescriptions

Engage targetedenterprises directlyor indirectly

Enter into a jointventure agreement at amain contract level withone or more targetedpartners

Engage targeted labourand targeted enterprisesdirectly

Engage targetedlabour directly

Level 3:Performanceparameters

The contractparticipation goal(value of goods,services and worksfor which thecontractorcontracts targetedenterprisesexpressed as apercentage of thecontract amount) isnot less than . . ..%

The contractparticipation goal (sumof the participationparameters in respectof each targetedpartner multiplied bythe contract amount ofthe contract, expressedas a percentage of thecontract amount) is notless than . . . %

The contractparticipation goal(amount equal to thesum of the wages andallowances for which thecontractor contracts toengage targeted labourand the value of goods,services and works forwhich the contractorcontracts targetedenterprises, expressedas a percentage of thecontract amount) is notless than . . . %

The contractparticipation goal(sum of thewages andallowancesexpressed as apercentage of thecontract amount)is not less than . .. .%

Level 4:Evaluation ofsolution

Apply the relevantprovisions of SANSISO 10845-5

Apply the relevantprovisions of SANS ISO10845-6

Apply the relevantprovisions of SANS ISO10845-7

Apply therelevantprovisions ofSANS ISO10845-8

Table 7 provides examples of other key performance indicators (KPI) (performance parameters) wherebespoke documents need to be drafted to enable solutions to be evaluated.

Table 7: Examples of KPIs and their definitions

KPI Definition of KPI

Contract local directemployment goal

The percentage of the total number of equivalent person days worked by peopleemployed by the contractor or a subcontractor within the site who are local people

Contract skillsdevelopment goal

The number of hours of skills development opportunities that a contractor contracts toprovide in relation to work directly related to the contract or order up to: completion in the case of a professional service contract; the end of the service period in the case of a service contract; completion in the case of construction contract; and the delivery date for all the work required in terms of a supply contract

Local content goal The portion of the tendered price which is not included in the imported content

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2.7.3 Decide on selection method

A selection method is the procedure used to solicit tender offer with a view to entering into acontract for goods or services or any combination thereof with the successful tenderer. Therange of commonly encountered selection methods are indicated in Table 8. SANS ISO 10845-1 provides information on their appropriate usage.

Table 8: Selection procedure options

Procedure Description

Negotiation procedure A tender offer is solicited from a single tenderer

Competitive selectionprocedure (Anyprocurement procedurein which the contract isnormally awarded to thecontractor who submitsthe lowest financial offeror obtains the highestnumber of tenderevaluation points)

Nominatedprocedure

Tenderers that satisfy prescribed criteria are entered into anelectronic database. Tenderers are invited to submit tender offersbased on search criteria and, if relevant, their position on thedatabase. Tenderers are repositioned on the database uponappointment or upon submission of a tender offer

Open procedure Tenderers may submit tender offers in response to anadvertisement by the client to do so

Qualifiedprocedure

A call for expressions of interest is advertised and thereafter onlythose tenderers who have expressed interest, satisfy objectivecriteria and who are selected to submit tender offers, are invited todo so

Quotationprocedure

Tender offers are solicited from not less than three tenderers in anymanner the client chooses, subject to the procedures being fair,equitable, transparent, competitive and cost-effective

Proposalprocedure usingthe two-envelopesystem

Tenderers submit technical and financial proposals in twoenvelopes. The financial proposal is only opened should thetechnical proposal be found to attain the minimum threshold score

Proposalprocedure usingthe two-stagesystem

Non-financial proposals are called for. Tender offers are theninvited from those tenderers that submit acceptable proposalsbased on revised procurement documents. Alternatively, a contractis negotiated with the tenderer scoring the highest number ofevaluation points

Confined marketprocedure

Tenders are invited from a very limited number of contractors whoare able to provide goods, services or works which are not freelyavailable in the market, or which are provided solely for the clientin accordance with unique requirements

Competitive negotiationprocedure (Aprocurement procedurewhich reduces thenumber of tendererscompeting for thecontract through a seriesof negotiations until theremaining tenderers areinvited to submit finaloffers)

Restrictedcompetitivenegotiations

A call for expressions of interest is advertised and thereafter onlythose tenderers who have expressed interest, satisfy objectivecriteria and who are selected to submit tender offers, are invited todo so. The client evaluates the offers and determines who mayenter into competitive negotiations

Open competitivenegotiations

Tenderers may submit tender offers in response to anadvertisement by the client to do so. The client evaluates the offersand determines who may enter into competitive negotiations

3 Documenting a procurement strategy

The compiler of a procurement strategy needs to identify and document the advantages anddisadvantages in the different options available in order to be able to make informed decisions,

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taking into account the stated primary and secondary procurement objectives and theoutcomes of the various analyses that were undertaken.

The factors that influence decisions made in determining a procurement strategy can competeagainst each other. Factors may need to be weighted and scored in order to arrive at theoptimum option.

The procurement strategy that is decided upon for a particular procurement or category ofprocurement needs to be documented in such a manner that the logic behind the choices thatare made at each step can be communicated to and reviewed by others. It should alsosummarise the decisions made in respect of the component strategies in respect of eachcontract or group of contracts as indicated in Table 9.

Table 9: Headings and illustrative content of a documented strategy for a particular contract

Aspect ofstrategy

Comments

Packagingstrategy

brief description of the package#

framework / non-framework+

Design andinterfacemanagementstrategy*

design strategy: design by client / develop and construct / design and construct / designand supply+interface management strategy: construction management / management contractor /general contractor+

Contractingstrategy

contract type: construction / design, build and operate / professional service/ service /supply+standard form of contract: bespoke / [name form of contract e.g.NEC3 Professional ServiceContract)+

pricing strategy: price-based (activity schedule / bill of quantities / lump sum /percentage ofcost of construction / price list / price schedule) / cost-based (cost plus / target cost / timebased)/ performance-based+

Targeting strategygoal associated with strategy: (describe)targeting strategy: granting of tender evaluation points / accelerated rotations / evaluationpoints in expressions of interest / financial incentives / creation of contractual obligations+#

Selection methodnegotiation / competitive selection (nomintaed / open / qualified / quotation / proposal usinga two envelope system / proposal using a two stage system / confined market procedure)/ competitive negotiations (restricted / open) +

* delete row if contract does not involve construction works and the client funds the acquistion (“make” decision)+ delete options which do not apply# describe so that readers understand the essence of the strategy and the KPI that is promoted

4 Procurement tactics

4.1 Concept

Procurement tactics are required to successfully implement procurement strategies and in sodoing improve project outcomes. They also impact upon the cost effectiveness of specificprocurement transactions.

Procurement tactics commonly relate to:

the publicity to attract the right level of interest from the market;

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the sequencing and timing of the issuing of tenders and orders; and

the setting up of procurement documents to solicit tender offers and to enter intocontracts, focusing on the selection of a contractor (the other party to a contract) who ismost likely to deliver best value or a cost-effective solution through the performance ofthe contract and the setting up of the terms and conditions of contracts to not onlyallocate specific risks between the parties to a contract but also to incentiviseperformance to achieve best results.

4.2 Publicity

Clients should alert markets through open and transparent processes to the opportunitiespresented by a project well in advance of the project, particularly where the projects are largeand complex. Market engagements may take many forms, including supplier conferences andnewsletters. Communications with potential tenderers (including key subcontractors) shouldcommence well before the embarking on procurement processes. Clients should in suchcommunications provide a clear understanding of what their core business activities andstrategies are to enable contractors, who carry out their own research, to match their tendersto client requirements.

Advertisements should be placed in a medium that enables a wide spectrum of suitablyqualified and eligible tenderers (target market) to access the opportunities that are presented.Advertisements should enable prospective tenderers to make informed decisions regardingthe attractiveness of the tender opportunity.

4.3 Procurement planning and sequencing

It is critically important to plan the sequencing and timing of the procurement of work packagesand the issuing of orders in terms of a framework agreement, particularly where there areinterdependencies and interfaces between work packages forming part of a project. Sufficienttime should be built into the overall programme to allow for all planning stages to be fullycompleted (both before construction starts and during the progressing of the project). Goodplanning should include getting the construction sequence right, assessing and managingproject risks and using value management to assess the contribution of each part of theconstruction process in order to improve the likelihood of achieving the project objectives andvalue for money (see Annexure A) and to minimise the likelihood of delays, extra costs andwaste/inefficiency.

The procurement process should not be rushed. Rushing it might lead to inadequatepreparation by the client or insufficient time for tenderers to consider, research and refine theirsubmissions. This might result in a failure to achieve value for money.

Consideration also needs to be given to the timing of procurement process. Issues such as thefollowing may need to be taken into account when planning the advertisement date for tenders:

seasons and industry holiday or shut down periods;

the current volume of work of a similar nature that has been put out to tender;

the client’s procurement approval requirements at control points leading to the award ofa contract or the issuing of an order in terms of a framework agreement; and

the work load on those responsible for processing submissions.

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A procurement plan should be produced to indicate the planned work load for all procurementprocesses within a project or programme over at least a one-year horizon to enable resourcesto be allocated to process the proposed procurements in accordance with the various projectprogrammes.

4.4 Setting up of procurement documents

4.4.1 General

Tactics are applied in the formulation of submission data, tender data, contract data and thepricing data associated with a contract (see SANS ISO 10845-2) in order to secure a suitablecontractor to deliver the required goods and services of an acceptable quality at a reasonableoutturn cost (cost post execution of the contract), while being mindful of life cycle costs.

4.4.2 Tactical variables associated with the process of offer and acceptance

The tactical variables included in the standard conditions for calling for expressions of interestand the standard conditions of tender contained in SANS ISO 10845-4 and SANS ISO 10845-3, respectively, are indicated in Table 10. Tactics should be directed towards the selection ofa contractor who is most likely to deliver best value through the performance of the contract,life cycle costs of what is offered, the availability of spares, operation and maintenancerequirements etc.

Time and effort are required by interested parties in responding to requests for expressions ofinterest and making tender submissions. The amount and type of information requested forreturn by clients should be appropriate and not be overly elaborate.

Tender assessment schedules may be required to reduce tender offers transparently to acomparative basis, particularly where pricing parameters are tendered which allow the price tobe developed once the work is identified using a cost-based pricing strategy or to determinethe cost of changes in requirements or events for which the contractor is not at risk.

4.4.2 Identification of a suitable standard form of contract

Standard forms of contract are drafted around significantly different objectives and principlese.g. master-servant relationships or collaboration between two experts, risk sharing or risktransfer, independent or integrated design, short-term relationships based on one-sided gainor long-term relationships focused on maximizing efficiency and shared value, etc. (seeAnnexure C)

Delivery processes for construction works can be loosely described as either being “traditionalpre-planned” or “collaborative”. “Traditional pre-planned” approaches commonly involvedetailed designs and specifications being prepared to allow procurement to proceed on thebasis of the lowest price with or without an adjustment for a preference, once the scope ofwork has been developed and is capable of being measured and priced. This method workswell for simple well-defined projects where the process of offer and acceptance is straightforward. In such approaches, the range of tactics which may be employed is low.

“Traditional pre-planned” procurement often seeks to “off load” considerable risks on thesupply chain through standard prescriptive terms. This transfer of risk is priced by contractorsand incorporated into their tender sums. A “collaborative approach” allows the parties tonegotiate both value-and-cost efficient solutions in relation to these risks. Risks can beidentified more readily within an integrated team working together on a project, and risk canbe discussed more openly with a greater emphasis on mitigation. Clients may wish to retain

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certain risks to benefit from lower tendered sums. Collaborative contracts require a number oftactical decisions to be made to enable the contract to not only allocate specific risks but alsoto incentivise performance to achieve best results.

Table 10: Examples of tactical variables included in standard conditions for the calling forexpressions of interest or tenders

Standardconditions

Example of tacticalvariables

Commentary

Conditions forthe calling forexpressions ofinterest (seeSANS ISO10845-4)

Eligibility criteria Eligibility criteria can be used to introduce minimum qualification or pre-qualification criteria to screen

out unsuitable respondents prior to the evaluation of submissions on acompliance / non-compliance basis, or

allow capability and capacity to deliver the required goods, servicesand construction works to be evaluated in two stages or to be omittedin the evaluation of tender offers during the second stage.

Clarification meetings Clarification meetings can be used to interact with and to communicatespecific requirements, innovations etc. associated with a procurement torespondents and to familiarise potential tenderers with unusual or not wellunderstood procurement strategies

Procedure for theevaluation ofsubmissions

Respondents can be evaluated in terms of their capability and capacity toperform the contract in terms of a scoring system, with or without minimumqualifying thresholds, to reduce the number of respondents invited tosubmit tenders (usually not less than three) to make the tender processmore manageable and attractive to prospective.The scoring criteria can be formulated in such a manner so as to favourthose respondents who are most likely to contribute to the client’sobjectives for the procurement.

Conditions oftender (seeSANS ISO10845-3)

Eligibility criteria Eligibility criteria can be used to introduce minimum qualification or pre-qualification criteria to screen out unsuitable tenderers prior to theevaluation of submissions on a compliance / non-compliance basis

Compensation oftenderers forpreparing aspect ofthe tender

Incentives for quality submissions can be provided, e.g. the awarding ofcash prizes in design competitions or the payment of a lump for submittinga tender where tenderers are required to design the proposed constructionworks

Clarification meetings Clarification meetings can be used to interact with and to communicatespecific requirements, innovations etc. associated with a procurement totenderers and to familiarise l tenderers with unusual or not well understoodprocurement strategies

Alternative tenderoffers

Main tender offers are not required to be submitted together with alternativetenders. This can be used to encourage innovation in certaincircumstances

Tender submission Tenderers may be permitted to offer parts or the whole of the goods andservices that are solicited. This can be used to make the contract moreattractive to smaller or specialist contractors who may not be able toprovide the full range of goods and services that are required

Procedure for theevaluation ofresponsive tenders

Tender offers can be evaluated in terms of two or three variables, namelyfinancial offer, preference and quality in terms of a points scoring systemwhich include weightings to weight the relative importance of the evaluationcriteria and sub-criteria (see ISO 10845-1 and ISO 10845-3)Minimum quality thresholds can be set to ensure that tenderers who areevaluated satisfy a minimum acceptable quality threshold and thereforecompete on a “level playing field” basis

Reducing tenderoffers to comparativeoffers

The reduction of tenders to a common basis can be based on life cyclecosts e.g. the cost divided by the service life (see (see ISO 10845-1 andISO 10845-3)

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Teamwork can overcome problems or difficulties which are encountered. Teamwork appliesjust as much to the internal relationships between the members of the client’s in-house staffas well as to the working relationships between members of the client delivery managementteam and those of the delivery team. Some forms of contract are drafted on a relationalcontracting basis, based on the belief that collaboration and teamwork across the whole supplychain optimises the likely project outcomes.

The choice of a standard form of contract is accordingly a tactical decision. The choice alsoneeds to be informed by the organisational culture.

4.4.4 Specific conditions of contract

The tactical issues that may need to be considered in the conditions of contracts for a particularprocurement include:

caps on liability and the exclusion of certain types of losses, e.g. limiting professionalliability, in order to make contracts more attractive to the market;

ownership of intellectual property;

guarantees and appropriate bonds;

advance payment to allow contractors to purchase, buy or mobilise items of equipmentbefore commencing with construction;

measures to hedge the impact of currency fluctuations;

incentives to encourage superior performance;

non-collusion clauses and/or certificates of independent bids and reciprocal anti-briberyagreements; and

in complex construction contracts, the selection of subcontractors on behalf of the clientin order to harness the design and installation skills of specialist trade contractors.

4.4.5 Approaches to achieve quality

Quality can be regarded as the totality of features and characteristics of a product or servicethat bears on the ability of the product or service to satisfy stated or implied needs. Thesatisfying of stated needs can be viewed as compliance with requirements or specifiedperformance whereas compliance with implied requirements can be viewed as the degree ofexcellence. Quality includes aesthetics, robustness, durability, maintainability, user comfort,environmental sustainability and life cycle costs as well as the delivery of a product or serviceswithin an agreed time and cost.

The manner in which quality can be addressed through procurement documents, in additionto the full and unambiguous specification of requirements in the scope of work (see SANS ISO10845-2), includes:

a) inviting tenderers who responded to a call for an expression of interest and who satisfyobjective criteria to submit tender offers i.e. apply the qualified selection method asdescribed in SANS ISO 10845-1;

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b) introducing quality considerations into the eligibility criteria e.g. requirements for ISO 9001(quality management systems), ISO 14001 (environmental management systems) ISO45001 (occupational health and safety (OH&S) management system) certification, priorexperience in completing contracts of a similar nature, requiring tenderers to submit plansfor monitoring and applying quality management principles in the performance of theircontracts and demonstration of financial standing and capability;

c) evaluating selected quality criteria as an integral part of the tender offer (see 4.4.6) and

d) taking cognizance of whole-life costing in the financial evaluation of tender offers e.g.reduce tender offers to a common basis by dividing price by service life.

Quality measures should not promote captive markets and should result in quality that isappropriate to comply with user requirements as opposed to the best quality available.

4.4.6 Cost effective procurement

There is a delicate balance between paying too much for a procurement transaction and payingtoo little and run the risk of obtaining an inferior procurement outcome or a product that that isnot capable of performing as intended. There is accordingly a need for a mechanism todifferentiate the quality of what is being offered in the tender process. This is necessary toconsider matters that form an integral part of the tender offer that cannot be directly expressedin monetary terms alongside the financial offer in order to improve procurement outcomes andto determine the most economically advantageous offer or the offer that represents the bestreturn on the investment to be identified. Such a mechanism needs to provide those taskedwith the evaluation of tenders with a means for making a reasoned judgement in this regard ina fair, transparent and accountable manner.

SANS ISO 10845-1 and SANS ISO 10845-3 makes provision for the evaluation of tender offersin terms of three variables, namely, financial offer, preference and quality (totality of featuresand characteristics of a product or service that bears on the ability of the product or service tosatisfy stated or implied needs). A point scoring system with weightings is utilised where thefinancial offer is evaluated along with preference or quality or both of these variables in orderto rank tender offers. The tenderer with the highest score is considered to be the mostcompetitive. Tender offers can accordingly be evaluated and ranked in terms of financial offer(adjusted for a preference if applicable) (lowest-priced compliant tender offer) or on a balancebetween the financial offer (adjusted for any preference if applicable) and quality (best-valueor economically most advantageous tender offer).

The awarding of contracts on the basis of the lowest-price compliant tender offer forinfrastructure works projects is not always cost-effective and may compromise the attainmentof a client’s value proposition for a project. Cost-effectiveness requires that processes,procedures and methods enable best-value outcomes in respect of quality, timing and costand the least resources to effectively manage and control procurement processes. Cost-effectiveness also requires that decision-making focusses on the attainment of value for moneythrough the evaluation of relevant costs and benefits together with the assessment of risks(see SANS ISO 10845-1).

Figure 5 illustrates quality considerations in the setting of weightings between financial offerand quality. Quality in the evaluation of tenders is an important tactical tool to differentiatebetween tenderers. It enables a balance between financial offer and quality to be found in acompetitive and transparent manner and seeks to achieve cost effective outcomes. Quality asan evaluation criterion is commonly omitted in the procurement of general goods and serviceswhich are well defined and where contractual risks are low (see Annex B of ISO 10845-1) as

24

there is frequently no need to differentiate between compliant tender offers other than on thebasis of the financial offer. Quality should be included in the evaluation of tender offers wheredownstream impacts and contractual risks are high.

The design of infrastructure commonly represents 1 to 2 percent of the overall lifecycle cost ofa project, with construction accounting for approximately 6 to 18 percent of the cost.Accordingly, 80 to 93 percent of the lifetime asset cost, is accounted for by operations, annualand capital maintenance and decommissioning activities. The downstream costs associatedwith poor and inefficient designs and poor construction is considerable.

There are many risks to manage in the procurement of infrastructure projects due tounforeseen events occurring during the delivery of the project (see Annex B of SANS ISO10845-1). Different teams have different abilities to deal with risk events which impact directlyon the timing and cost of the procurement should they manifest. Furthermore, a range ofdifferent combinations of goods and services with differing characteristics such as initial cost,reliability, life-cycle costs, and operating costs may satisfy the performance requirements. Theoutturn cost (cost post execution of the contract) can be very different to the initial contractprice when a contract is entered into.

It is therefore imperative that where downstream impacts and contractual risks are high thosewith the requisite skills are appointed to undertake the work at a reasonable price rather thanthe lowest-priced compliant tender offer. The evaluation of quality in tender offers as providedfor in SANS ISO 10845-1 and SANS ISO 10845-3 provides an opportunity for balancing thefinancial offer against the likelihood of achieving the intended outcome. It promotes cost-effective procurement outcomes and mitigates risks including damaged reputations.

Figure 5: Quality considerations in the evaluation of tender offers

Specialist workrequiring considerableinnovation, creativity,and expertise or skill(or both) or work thathas a high ownstreamimpact.Cllaborativeapproaches wherethe scope of work is illdefined when thepartners are selected.

Complex workcharacterized byrequirements forhigher levels of skills,greater resources ornot well-defined inputsand outputs.

Simple/straight-forward/routine workwhere the tasks /activities are of astraightforward naturein terms of which inputsare relatively wellknown and outputs canbe readily defined.

Quality mostimportant

Quality leastimportant

QU

ALI

TY

Incr

easi

ng im

porta

nce

ofqu

ality

(and

wei

ghtin

g fo

rqu

ality

)

Financialoffer leastimportant

Financialoffer mostimportant

Increasing importance of price (andweighting of price)

FINANCIAL OFFER

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Annexure A: Delivery management concepts and practices

A.1 Introduction

The construction industry delivers its products in a uniquely project-specific environment whichcontinuously involves the occurrence of events, which may be foreseen or unforeseen, thatcan impact on project outcomes during the protracted delivery process. It also involvesdifferent combinations of funders, clients and built environment professionals, site conditions,materials and technologies and general contractors, specialist contractors, skills andworkforces.

A supply chain can be regarded as the sequence of tasks that provides products or servicesto the organisation. The supply chain for infrastructure can be represented as the flow ofinformation from one set of tasks to the next with decision points or gates at the boundariesbetween tasks which provides the opportunity for ensuring that the proposed project remainswithin agreed mandates, aligns with the purpose for which it was conceived, and can progresssuccessfully to the next task. Procurement binds the participants in the supply chain (builtenvironment professionals, general contractors, specialist and subcontractors) and defines theobligations, liabilities and risks that link the parties together in a process that needs to delivervalue for money. Delivery management provides leadership and direction to a network ofsuppliers including, as necessary, professional services, contractors and subcontractors todesign, scope, detail and deliver infrastructure projects on a site.

A.2 Value for money

Value for money refers to a project that is well worth the money spent on it. It is the effective,efficient and economic use of resources, or the optimal use of resources to achieve intendedoutcomes). Value for money is the attainment of a desirable or satisfactory outcome in relationto a carefully considered budget. In the context of construction works projects, projectoutcomes are benchmarked against the client’s value proposition, usually set at the outset ofthe project and perhaps modified at the start of construction or supply.

The efficient and effective functioning of the client’s procurement and delivery managementsystem is fundamental to delivering value for money. Value for money is all about striking thebalance between economy, efficiency and effectiveness in the results chain frameworkindicated in Figure A.1. Implementation sits between “economy” and “effectiveness”. Projectsneed to be executed “efficiently” in order to minimise delays, scope creep and unproductivecosts and to mitigate the effects of uncertainty on objectives so as to maintain the value formoney proposition formulated at the outset of the project. Any gap between intended andachieved outcomes put value for money for a project at risk.

The planning phase is negatively impacted on by optimism bias (the human mind’s cognitivebias in presenting the future in a positive light) and strategic misrepresentation (behaviourthat deliberately underestimates costs and overestimates benefits for strategic advantageusually in response to incentives during the budget process). The implementation phase ispositively impacted upon by procurement strategy and tactics and negatively impacted on bythe inability to manage risk, multiple projects against an annual budget, interference andscope creep and to create an enabling environment within which delivery is to take place.

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Figure A.1: The value for money concept

A.3 Achieving the client’s value proposition for a project

The physical delivery of infrastructure necessitates that a delivery team be put in place usingan organisation’s own resources or contracted resources. This team performs a “supply”function and carries out project management and design function, provides professionalsupport services and manufactures, maintains, constructs, installs, provides, alters,rehabilitates, refurbishes or alters construction works. A client delivery management team, ledby a client delivery manager, also need to be established to provide effective leadership anddirection to the delivery team and meaningfully engage with internal and external stakeholders.This team, which performs a “buying” function, needs to own the business case, procure andpay the resources to deliver the project, lead the project, manage relationships, overseeaspects of delivery and provide client direction (see Figure A.2).

A client delivery manager needs to be held accountable for project outcomes. Such a manageralso needs to lead the client team with single point accountability and have direct access tosenior client management when decisions regarding a significant departure from the plan orbudget needs to be taken. The client delivery manager needs to be supported by both atechnical team and an administrative team. The technical team may be required to provideadvice on a range of matters, gather, process and store information that is necessary tomanage the delivery of projects, manage activities associated with the initiation of projects,formulate, shape and document the client’s specific requirements, monitor and evaluate theoutputs of the delivery team, establish financial and cost controls and reporting systems andprocure the resources which are necessary to deliver the project. The administrative teamneeds to prepare the necessary documents for payment and to develop and maintain and keepup to date a number of registers for project governance purposes which capture informationsuch as that relating to planned procurements, contractual commitments, contracts, paymentsand purchase orders.

The client’s business case, vision, values and project priorities collectively make up the client’s valueproposition for a project i.e. the promise of measurable benefits resulting from the project. Activitiesassociated with the planning, designing, manufacturing / fabrication, construction / installation andcommissioning need to translate the client’s value proposition into project outcomes which impact onthe three aspects of sustainability (economic, environmental and social) and result in a product. Clients

Cost Input Activities Outputs Outcomes

Economy Efficiency Effectiveness

Value for money

Planning(what inputs are

required to achieve adesired outcome?)

Implementation(how well are inputs

converted into outputs?)

Close out(how well do outputs

achieve desiredoutcomes?)

Impact

27

can influence project outcomes through client leadership at both a programme and project level,governance and procurement strategy and tactics (see Figure A.3).

Figure A.2: The principal role players in the delivery of infrastructure projects

Figure A.3: Translating the client value proposition for an infrastructure project intoproject outcomes

Client delivery management teamStakeholders (examples)

Owns the business case Procures and pays the resources to

deliver the project Leads the project Manages relationships Oversees aspects of delivery Provides client direction

Engagement

Leadership and direction

Delivery team

Performs project management anddesign functions

Provides professional support services Manufactures, maintains, constructs,

installs, provides, alters, rehabilitates,refurbishes or alters construction works

Custodian - the caretaker ofconstruction works throughout its

lifecycle

Financier– provides funding

Affected communities – thecommunities that are impacted

upon by the projects

End user / operator – thebeneficiary of the business case

Regulators and utilities – haveinterfaces with the works

Interaction,when necessary

Client value proposition

Client brief to satisfythe business case

Scope

Time forcompletion

Budget

Project outcomes

Impacts (any change that may bebeneficial or adverse): financial (costs and benefits

and economic legacy) social (quality of life, skills

development, and incomeflows to targeted people andbusinesses)

environmental (use of theearth’s resources)

Infrastructure (works withfunctionality, functional

performance and quality in all itsforms, delivered for a cost and

ready for use or others to do theirwork)

Client values (ethos,vision and core values

for a project)

Activities

Plan Design Manufacture /

fabricate Construct / install Commission

Res

ourc

es re

quire

dto

del

iver

pro

ject

s

Client influencing practices(client leadership, governance

and procurement practices,strategy and tactics)

Delivery team controls

Specify Procure Deliver

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Annexure B: Framework agreements

B.1 Introduction

A framework agreement is defined in SANS ISO 10845 as “an agreement between anemployer and one or more contractors, the purpose of which is to establish the terms governingorders to be awarded during a given period, in particular with regard to price and, whereappropriate, the quantity envisaged.” Framework agreements enable an employer to procureengineering and construction works, goods and services on an instructed basis (call-off) overa term without any commitment to the quantum of work instructed in the absence of a fullydeveloped scope of work (see Figure B.1). This may be achieved by issuing a package(construction contract), batch (supply contract) or task (service contract) order in terms of aframework agreement during the term of the contract, i.e. an instruction to provide works, tosupply items of goods in a batch, or work within a service within a stated period of time.

Price in the context of a framework agreement may be considered to be a sum of money forwhich something is purchased, the actual cost of acquiring something calculated according tosome specific measure, or an estimate of what the transaction is worth. Accordingly, frameworkagreements contain prices for work to be executed over a term or cost parameters whichenable prices to be determined once the scope of work has been determined. They may alsocontain a combination of prices and cost parameters.

Framework agreements reduce the employer’s need to re-advertise and approach the marketfor goods, services or works falling within the scope of the agreement over the term of theagreement and the number of relationships to be managed. They also provide employers withprogramming flexibility to manage expenditure relating to the delivery and maintenance ofinfrastructure over time and enable collaborative relationships to develop in order to deliverbetter value and project outcomes, particularly those relating to contractor development,community participation and skills development over time. They also provide an opportunityfor contractors to improve their internal management systems, to develop their supply chainsand improve their Broad-Based Black Economic Empowerment status or engage localresources during the term of the contract through continuity of work over a longer term than isthe case in non-framework agreements.

Framework agreements enable lessons learned in one package or task order to be taken tothe next and enable a team to work together on an integrated approach over a period of time.The promotion of secondary (developmental) procurement objectives in this contracting

Frameworkagreement

Package / batch /task order #1 Package / batch /

task order #2

Package / batch /task order #3

Package / batch /task order #6

Package / batch /task order #5 Package / batch /

task order #4

Start of term

End of term

Figure B.1: Call-offs over the term of a framework agreement

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arrangement is also very flexible and, unlike most other delivery models, allows the employerto change the deliverables associated with such a policy over time in response to emergingneeds and changing circumstances. This enables meaningful development of local enterprisesand labour to take place over the term of the contract.

It is also possible, with careful planning, for one organisation to make use of anotherorganisation’s framework agreement to satisfy their needs. This can be used to overcomepublic sector capacity constraints through the establishment of regional frameworkagreements.

B.2 Fundamental principles

Framework agreements are only entered into with contractors (including suppliers and serviceproviders) who have the resources and the capability to carry out work that is likely to beinstructed. They may be entered into with contractors for a term generally not exceeding 3 to4 years. Suitable framework agreements are entered into with a single or a limited number ofcontractors, based on the projected demand and geographic location for goods, services orworks.

Framework agreements need to contain terms which establish:

the rights and obligations of the contracting parties and the agreed procedures for theadministration of the contract and the issuing of orders;

the term of the agreement during which an order may be issued;

the scope of work which may be included in an order to enable decisions to be made asto what is covered in the agreement and what needs to be procured outside of theagreement;

the basis by which contractors will be remunerated for work performed in terms of anorder, if and when such an order is issued; and

where a framework agreement is entered into with more than one contractor, the mannerin which competition amongst framework agreement for a package order is to beconducted.

Framework agreements that are entered into may not commit an organ of state to any quantumof work beyond the first batch, task or package order. Furthermore, such agreements may notbind an employer to make use of such agreements to meet needs. The market needs to beapproached for goods, services and works whenever better value in terms of time, cost andquality may be obtained.

Batch, task or package orders:

may only cover goods, services and works work falling within the scope of workassociated with the agreement which may not be amended for the duration of thecontract;

may not be issued after the expiry of the term of the framework agreement (see FigureB.2); and

may be completed even if completion of the order is after the expiry of the term (seeFigure B.2).

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Figure B.2: Timing of call offs in a framework agreement

Contractors may not proceed with work associated with a batch, task or work package untilsuch time that an order has been issued in terms of the contract.

Call-offs from framework agreements (issuing of batch, task or package orders) with a numberof framework contractors covering the same scope of work may be made with and withoutrequiring competition. Where competition takes place amongst framework contractors, it needsto be conducted in a non-discriminatory manner such that competition is not distorted.

Competition amongst framework contractors for call-offs needs to take place where:

there is no justifiable reason for issuing a batch, task or package order to a particularframework contractor;

the terms in the framework agreement are insufficiently precise or complete to cover theparticular requirement e.g. delivery time scales or time estimates to complete the batch,task or package order (productivity);

a better quality of service can be obtained through a competitive process

Justifiable reasons for issuing a batch, task or package order to a particular frameworkcontractor include:

the framework contractor provided the most economical transaction when the financialparameters included in the contract are applied and has the capacity to deliver;

the required goods, services or construction works cannot technically or economically beseparated from another contract or batch, task or package order previously performedby a specific contractor;

the service or construction works being instructed are largely identical to work previouslyexecuted by that contractor;

the value of the batch, task or package order is less than the threshold for the quotationprocedure;

NotPermitted

Start date End date

Start EndOrder 1

Start EndOrder 2

Start EndOrder 3

Start EndOrder 3

Term of framework agreement

Permitted

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the schedule for delivery necessitates that each of the framework contractors be issuedwith batch, task or package orders on a continuous basis; and

capacity to execute the batch, task of package order.

The opening of competition amongst framework contractors is only necessary when nojustifiable reasons for not doing so cannot be found.

B.3 Putting a framework agreement in place

B.3.1 Acquisition process

Framework agreements may be entered into with contractors for a term by:

inviting tender offers to enter into a suitable contract for the term, using stringent eligibilityand evaluation criteria to ensure that contracts are entered into with only thosecontractors who have the capability and capacity to provide the required services; and

entering into a limited number of contracts based on the projected demand andgeographic location for such services.

The process for putting in place a framework agreement is the same as that for any othercontract i.e. it follows the normal construction procurement procedures. Tendered financialparameters, which may include the price for a first order and the financial parameters whichare to be applied over the term, are reduced to a common base for comparative purposes.

A call for expression of interest is required to establish the CIDB contractor grading designationrequirements as no price is tendered for the framework agreement. The CIDB contractorgrading designation should be based on the anticipated annual value the work executedthrough the framework agreement in accordance with the provisions of the ConstructionIndustry Development Regulations should such regulations be applied.

B.3.2 Contractual agreements

B.3.2.1 Key considerations

A key consideration in entering into a framework agreement is to decide on how contractorsare to be paid for broadly defined work which is usually not sufficiently scoped to enable it tobe priced at the time when the agreement is entered into. Price lists with a transparentmethodology to determine the price of items that are not included in the price list at the time oftender may be used where there work in orders is repetitive in nature. Cost based pricingstrategies are required where there is little or no repetition in the work required in successiveorders.

It should be noted that the FIDIC, JBCC and SAICE forms of contract for works (see AnnexureC) do not make provision for cost based pricing strategies and don’t provide a transparentmeans for determining the price of items that are not included in the price list at the time oftender. The NEC3 family of contracts addresses both these requirements and more.

The NEC3 family of contracts facilitates the implementation of sound project managementprinciples and practices as well as defining legal relationships. It is drafted on a relationalcontracting basis based on the belief that collaboration and teamwork across the whole supplychain optimises the likely project outcomes and is therefore based on “discussion at the time”rather than “argument later.” It contains clear procedures with defined time limits for actions to

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be taken and provides for effective control of change, speedy agreement of time, quality andcost impacts of change, improved forecasting of end costs and end dates. It also includesrequirements for the parties to issue to each other early warnings of risks relating to time, costand quality. It assesses compensation events (events for which the employer is at risk) whichentitle the contractor to more money on the basis of cost as defined in terms of the contractuplifted by any percentages for overheads and profit or fees provided for in the contract forwork already done or a forecast for the work not yet done. The NEC3 family of contracts isaccordingly well suited to form the basis of framework agreements.

B.3.2.2 Entering into a framework agreement using the NEC3 Framework Contract

The NEC3 family of documents includes a Framework Contract which is intended for use forthe appointment of one or more suppliers to carry out work on an as instructed basis over aset term using any of the NEC3 contracts. It is used as a “head contract” and imposes anobligation on the Employer to establish selection procedures where a framework agreement isentered into with more than one contractor; and the supplier to obey an instruction issued interms of the contract and to attend meetings with the employer and others as stated in theFramework Information.

The Framework Contract makes provision for the obtaining of advice for a proposed WorkPackage by the supplier on a time charge basis if instructed to do so. It also requires theselected supplier to submit a quotation for the proposed Work Package and to provide theadditional Contract Data that is specific to the Work Package. The Employer may issue aPackage Order if the quotation is accepted, an instruction to submit a revised quotation or anotification that the proposed Work Package will not be issued to the Contractor. A Supplier isnot permitted to proceed with a Package Order without an instruction from the Employer to doso. After the end date, the Employer may not issue a Time Charge Order or Package Orderand the Supplier is required to complete the Time Charge work and Work Packages orderedbefore the end date. Either Party may terminate their obligation under the contract at any timeby notifying the other party. After termination the Employer may not issue a Time Charge Orderor a Package Order and the Supplier is required to complete time charge work and WorkPackages ordered before such notification.

B.3.2.3 An alternative approach to framework agreements using the NEC3 family ofcontracts

The NEC3 Supply Short Contract (SSC) and NEC3 Term Service Short Contract (TSSC)contain core clauses for Batch Orders and Task Orders respectively, while the NEC3 TermService Contract (TSC) has a Secondary Option (X19) for Task Orders. The NEC3Professional Service Contract (PSC) has a Main Option for a term contract (Option G) whichmakes provision for Task Orders.

These standard provisions for Task and Batch Orders enable “call offs” to be made as they allrequire such orders to include:

a detailed description of the work required;

either a priced list of items and the total of Prices or a forecast of the total of Prices forthe order based on the provisions of the contract;

the starting and completion dates for a batch / task order; and

the amount of delay damages for late completion.

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A contractor is not permitted to start work on an order until the order is received and is requiredto complete the work associated with an order before the completion date for an order. Theemployer is not permitted to issue an order after the end of the term of the contract. Provisionfor price escalation needs to be made either in terms of the standard secondary option clauses,if provided (i.e. Option X1 in the PSC and TSC), or in terms of a Z clause (i.e. additionalconditions of contract)

Accordingly, framework agreements can be entered into by simply making use of the Task orBatch Orders that are embedded in the NEC3 supply and service contracts. There is no needto enter into two contracts – an NEC3 Framework Contract and an NEC3 supply or servicescontract as all the task or batch specific Contract Data is located in the order and the selectionand quotation procedures for an order can be included in the scope of work.

A Z clause, drafted along the lines of that contained in Option X19 of the TSC can be addedto the NEC3 Engineering and Construction Contract (ECC) or the NEC3 Engineering andConstruction Short Works Contract (ECSC) to create framework agreements and obviate theneed to enter into two contracts. The Contract Data that is entered into using an NEC3 ECCor NEC3 ECSC can then make reference to Package Orders e.g. the key dates and theconditions to be met are as stated in the Package Order. In this manner, Package Orders canbe issued through the standard NEC3 Contract. Accordingly, the NEC3 ECC or NEC3 ECSCbecomes a framework agreement which sets out the generic terms, conditions and worksinformation for the “call offs” over the term and the Package Orders contain the packagespecific data and information. The “contract” for a Work Package is therefore the PackageOrder read together with the contract that is entered into based on the ECC or ECSC.

B.4 Differences between term contracts and framework agreements

A term contract is a contract that enables the employer to order work over a fixed term atagreed rates. Such contracts have at the time that they are entered into a contract value. Thosewho administer such contracts are authorised to instruct the required work over the termagainst such contracts.

Some forms of contract such as the NEC3 family of contracts contain a procedure to issueorders during the term of the contract to enable the amount to be paid to a contractor forcarrying out a specified task to be determined. This feature within a contract provides theemployer with a facility to control work and the costs relating thereto on a task by task basis.There is no need for the person administering the contract to obtain permission to issue anorder provided that the price for executing the order falls within the sanctioned contract amountat the start of the contract. There is also no need for a formal review of the order prior to beingissued to the contractor as the work that is required is sufficiently scoped and described at thetime that it is priced and the terms sufficiently precise and complete to cover the instructedwork.

A framework agreement is different to a term contract in that it has no value at the time of itsformation and more than one contract covering the same scope of work may be entered into.Framework agreements frequently have no fixed rates. Consequently, the terms of the contractmay have to be applied in order to arrive at a price. Those administering such contracts requireauthorisation to issue an order for three reasons basic:

authority to incur the required expenditure;

confirmation that the goods, services or works fall within the scope of the frameworkagreement approved at the time that the framework agreement was entered into; and

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where, more than one framework agreement covers the same scope of work, theacceptability of the reasons for selecting a particular framework contractor.

B.5 Issuing of task, batch and package orders

An organisation’s procurement policy needs to make provision for the entering into offramework agreements and the manner in which orders are issued in terms of a suitable controlframework.

The activities, key actions, responsibilities and gates associated with the issuing of batch, taskor package orders are indicated in Table B.1. The control framework for the issuing of ordersagainst a framework agreement is indicated in Figure B.3.

Table B.1: Procurement activities, key actions, responsibilities and gates associated with theissuing of orders

Activity*

1 FG1 Confirm justifiable reasons for selecting a framework contractor where there is more than oneframework agreement covering the same scope of work

2 Prepare procurement documents

3 FG2 Obtain approval for procurement documents

4 FG3 Confirm that budgets are in place

5 Quotations amongst framework contractors not invited: Issue draft order documentation and consultwith contractor and prepare evaluation reportQuotations amongst framework contractors invited: Invite quotations from all framework contractorsparticipating in the agreement, receive and evaluate submissions and prepare evaluation report

6 FG4 Authorise the issuing of the order

7 Log order onto management system

8 Issue order to contractor

9 Notify issuing of order to oversight person

10 Administer orders in accordance with contract and confirm compliance with requirements

*Shaded cells indicate the presence of a framework gate

The review of procurement documentation associated with the issuing of an order needs toconfirm that:

any standard templates required by the client organisation have been correctly appliedand the necessary approval has been obtained for additional clauses or variations to thestandard clauses in the conditions of contract not provided in the organ of state’sapproved templates or the contract;

the scope of work adequately establishes what is required and the constraints to themanner in which the contract work is to be provided;

the provisions for competition amongst framework contractors, if relevant, and theselected options are likely to yield best value outcomes; and

the risk allocations are appropriate.

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An evaluation report covering the application of the negotiated procedure for the issuing of anorder, needs to confirm that the negotiated amounts are market-related and represent valuefor money. Where the total of the prices associated with a target cost contract is negotiated,the total of prices should be certified as being fair and reasonable by a professional quantitysurveyor registered in terms of the Quantity Surveying Profession Act or a professionalengineer registered in terms of the Engineering Profession Act.

The person responsible for authorising an order, prior to authorising the issuing of an order,needs to:

confirm that the required goods or services, or any combination thereof, are within thescope of work associated with the relevant framework agreement; and

consider the recommendations of the evaluation report where competition amongstframework contractors takes place or a significant proportion of the total of the prices isnegotiated, based on the financial parameter contained in the framework agreement,and either confirm the reasonableness of such recommendations and sign theacceptance of the order, or refer the evaluation report and recommendation back tothose who prepared it.

Figure B.3: Control framework for the issuing of orders in terms of a framework agreement

Approval of procurementdocuments

yes

Confirmation of reasonsfor not inviting quotations

Authorisation for issuingof order

no

Administer contract and confirmcompliance with requirements

Upload dataon financial

managementand payment

system

Issueorder

FG2

FG1

FS1

Confirmation of budget

Frameworkagreement in place?

Is there more than oneframework agreement covering

the same scope of work?

Are there justifiable reasonsfor not inviting quotations?

noyes

yes

FG3

no

Documentationreview report

Evaluationreport

FG4

Invite quotationsfrom all frameworkcontractors

Solicit tender offersfollowing normal

procurement procedures

FG = Framework gate

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B.6 Making use of another organisation’s framework agreement

It is possible for one organisation to make use of another organisation’s framework agreementprovided that:

it was put in place following a competitive tender process;

the agreement is suitable for the intended use;

the required goods, services and works fall within the scope of such contract;

the framework contractor agrees to accept an order from the other organisation and suchan organisation undertakes to pay the contractor in accordance with the terms andconditions of the agreement; and

the term of the framework agreement does not expire before the issuing of the requiredorders.

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Annexure C: Selecting a standard form of contract

C.1 Introduction

ISO 6707-2 (1993) defines conditions of contract as the “terms that collectively describe therights and obligations of contracting Parties and the agreed procedures for the administrationof their contract.” A standard form of contract or standard contract, on the other hand, is acontract between two parties that is published by an authoritative industry body with fixed termsand conditions which are deemed to be agreed and are not subject to further negotiation oramendment. Standard forms of contract are commonly used on infrastructure projects.

The standard forms of contract for infrastructure projects, apart from dealing with rights andduties of the parties to the contract (employer and contractor), commonly make provision formatters such as:

procedures for making changes to the scope of work (documents that specify and describethe goods, services, or construction works which are to be provided, and any otherrequirements and constraints relating to the manner in which the contract work is to beperformed) after the formation of a contract;

procedures to address the impacts on time, cost and quality or performance of changesmade to the scope of work after the formation of a contract and the occurrence of eventsfor which the contractor is not at risk;

the seeking of instructions on how to proceed when particular events occur orcircumstances arise;

the risks which are bone by each party and how the contractor is compensated for riskevents for which he is not at risk;

how defects (parts of the goods, services of works which are not in accordance with thescope of work) are to be dealt with;

procedures for termination and the determination of what is due to the contractor upontermination;

the certification of amounts due in terms of the contracts;

the certification of delivery or completion of the works;

the actions of an agent of the employer; and

procedures for the resolution of disputes

Standard forms of contract make provision for the adjustment to both the prices and the timefor completion for changes in the production information1 and for risk events for which thecontractor is not at risk. Increases in the prices after the award of a contract or the issuing of

1 Production information is information which provides the detailing, performance definition, specification, sizingand positioning of all systems and components enabling either construction (where the constructor is able to builddirectly from the information prepared) or the production of manufacturing and installation information forconstruction.

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an order arising from changes in the production information or risks events does not constitutean amendment to the contract.

Standard forms of contract enable tenderers to take into account the allocation of risksembedded in such contracts when preparing tenders for infrastructure projects and enablestenders to be evaluated on a comparative basis. There is also no need for tenderers who arefamiliar with a particular form of contract to price risks arising from uncertainties as to howparticular issues will be viewed or handled in terms of the contract.

Risks need to be unambiguously stated and understood when tenders are priced so as to avoidexcessive risk pricing. The difficulty in tampering with the standard clauses of a contract arethat the bespoke provisions in many instances change the allocation of risks between theparties or introduce conflicts, ambiguities and uncertainties in the provisions of the contract. Ifa party fails to appreciate what has been changed, it may result in an inability to resolve issueswhich in turn can lead to litigation and poor contractor performance. If contractors do pick it upat tender stage, they will simply walk away from the project or risk price it. Those that do notpick it up will inevitably grossly under-price the tender and will not be able to cope if anythingsubsequently goes wrong. The cost to complete the works where a contractor goes insolventis considerably higher than the cost of the outstanding work. Performance bonds are usuallyinsufficient to cover such increased costs.

The range of commonly used forms of contract in the South African public sector is set out inTable C1. Table C1 also indicates their intended usage and the standard pricing strategieswhich they support.

C.2 Selecting a suitable construction contract

C.2.1 General considerations

The first standard form of contract in the UK was developed for the London Metropolitan Boardof Works during the 1860s, based on a master servant relationship. Current forms of contractare drafted around significantly different objectives and principles e.g. master-servantrelationships or collaboration between two experts, risk sharing or risk transfer, independentor integrated design, short-term relationships based on one-sided gain or long-termrelationships focused on maximizing efficiency and shared value, etc. They are constantlyevolving and being refined.

The forms of contract contained in Table C.1 are drafted around significantly differentobjectives and principles which enable risks to be allocated and managed in a number ofdifferent ways ranging from risk sharing to risk transfer in return for a price premium. Each ofthese forms of contract have their advantages and disadvantages.

The general factors which need to be considered when deciding upon a particular form ofcontract for construction include:

the complexity of the works;

management capacity, capabilities and expectation of the parties and their staff andagents;

requirements for specific contracting strategies;

requirements relating to the assignment / management of risk and back to back contractsfor the engagement of all types of subcontractors;

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Table C1: Standard forms of contract commonly used in South Africa

Form of contract Intended usage Standard pricing strategies provided for (see Table 4)Institution of Civil Engineers (ICE)NEC3 Engineering andConstruction Contract

Engineering and construction including any level of design responsibility. Options for activity schedule, bill of quantities, target cost,cost reimbursable and cost plus

NEC3 Engineering andConstruction Short Contract

Engineering and construction which do not require sophisticatedmanagement techniques, comprise straightforward work and impose onlylow risks on both the employer and contractor.

Price list

NEC3 Professional ServicesContract

Professional services, such as engineering, design or consultancy advice. NEC3 - options for activity schedule and target costNEC3 - option for time basedNEC3 – option for a combination of a price list and time based

NEC3 Professional ServicesShort Contract

Professional services which do not require sophisticated managementtechniques, comprise straightforward work and impose only low risks onboth the client and consultant.

Price list

NEC3 Term Service Contract Manage and provide a service over a period of time. Options for price list, target cost or cost reimbursableNEC3 Term Service ShortContract

Manage and provide a service over a period of time, or provide a servicewhich does not require sophisticated management techniques, comprisesstraightforward work and imposes only low risks on both the employer andcontractor.

Price list

NEC3 Supply Contract Local and international procurement of high-value goods and relatedservices, including design.

Price list

NEC3 Supply Short Contract Local and international procurement of goods under a single order or on abatch order basis and is suitable for use with contracts which do not requiresophisticated management techniques, and impose only low risks on boththe purchaser and the supplier.

Price list

NEC4 Design build and operate Design, construct or modify and operate assets necessary to meet theclient’s operational requirements

Combination of price list and cost reimbursable

Joint Building Contracts Committee (JBCC)JBCC Principal BuildingAgreement

Buildings and related site works designed by the employer. Bill of quantities

JBCC Minor Works Agreement Buildings and related site works of simple content designed by theemployer.

Bill of quantities or lump sum

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Form of contract Intended usage Standard pricing strategies provided for (see Table 4)International Federation of Consulting Engineers (FIDIC)FIDIC Short Form of Contract Building or engineering works of relatively small capital value, or for

relatively simple or repetitive work, or for work of short duration. Use fordesign by employer- or contractor-designed works.

Options for lump sum, bill of quantities and costreimbursable,

FIDIC Conditions of Contract forConstruction for Building andEngineering Works designed bythe Employer

Building or engineering works designed by the employer. (The works mayinclude some elements of contractor-designed works.)

Bill of quantities

FIDIC Conditions of Contract forplant and design-build forelectrical and mechanical plant,and for building and engineeringworks, designed by thecontractor

The provision of electrical or mechanical plant and the design andconstruction of building or engineering works.

Lump sum

FIDIC Conditions of Contract forEPC Turnkey Projects

The provision on a design and construct (turnkey) basis of a process orpower plant, of a factory or similar facility, or an infrastructure project orother type of development.

Lump sum

FIDIC Conditions of Contract forDesign, Build and OperateProjects

“Green field” building or engineering works which are delivered in terms ofa traditional design, build and operate sequence with a 20-year operationperiod. (The contractor has no responsibility for the financing of theproject/package or its ultimate commercial success.)

Lump sums and price list

Construction Industry Development Board (CIDB)CIDB Standard ProfessionalService Contract

Professional services No specific provisions

CIDB General Conditions ofPurchase

An order form type of contract for low-value goods without any incidentalwork or services on or before a specified date being required.

Prices or rates

CIDB Contract for the Supply andDelivery of Goods

Simple, regional purchase of readily available materials or commoditieswhich require almost no management of the buying and delivery process,minimal testing, installation and commissioning on delivery.

Price list

CIDB General Conditions ofService

An order form type of contract where low-value services on or before aspecified date are required.

No specific provisions

South African Institution of Civil Engineering (SAICE)SAICE General Conditions ofContract for Construction Works

Engineering and construction, including any level of design responsibility. Bill of quantities or lump sum

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the ability and capacity of skilled resources / desirability within the client body to handledifferent administrative procedures for building and civil engineering contracts;

training requirements; and

standardisation on a single system capable of handling any discipline and anycontracting strategy in a single document in respect of engineering and constructionworks and all other procurements i.e. supplies, professional services and term servicesin a series of documents, that are based on a common philosophy, terminology andmanagement processes.

Table C2 indicates some of the responses of the different forms of contract to theaforementioned general considerations. There are, however, a number of other considerationswhich may need to be taken into account when making a choice (see C.2.2 and C2.2.3).Choosing the right form of contract is part of the innovative thinking necessary to improveproject delivery. It is a strategic decision that an organisation needs to make.

Table C2: Comparison of different forms of construction contracts

Criteria FIDIC RedBook (1999)

GCC 2010 JBCC 2000PBA (2007)

NEC3

1 Correlation / fit with respect to Society ofConstruction and Law’s Delay and DisruptionProtocol (2002)

Moderate Poor Poor Excellent

2 Potential for collaborative working Moderate Poor Poor Excellent

3 Target contract option for application inframework contracts, collaborative workingand early contractor involvement

No No No Yes

4 May be used for both engineeringinfrastructure and building projects

Yes Yes No Yes

5 The main contractor may be required toassume responsibility for the design or theworks or the finalisation of the design

Yes(yellow andsilver)

Yes No Yes

6 The main contractor may be required tooperate as a management contractor

Yes(silver)

No No Yes

7 Cost based pricing strategies, including targetcost contracts

No No No Yes

8 Back to back subcontracts Yes Yes Yes Yes

9 Short forms of contract suitable for use whererisks are low and there is no requirement forsophisticated management techniques

Yes None Samemanagementrequirementsas for principalcontract but nosubcontracts

Yes

10 An open book approach to the cost of change No No No Yes

11 Pricing structures that align payments toresults and reflect a more balanced sharing ofperformance risk

No No No Yes

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C.2.2 Managing delays and disruptions

Delays and disruptions need to be managed. Extensions of time caused by events which arebeyond the contractor’s control are necessary to relieve the contractor of delay damages andto establish a new contract completion date. The Society of Construction and Law’s Delay andDisruption Protocol (2002) contains 21 core principles to provide a means by which the partiescan resolve these matters and avoid unnecessary disputes.

These 21 core principles suggest that delays and disruptions should be handled in terms ofthe following principles:

The contractor should prepare a programme showing the manner and sequence in whichthe contractor plans to carry out the works and have such a programme accepted by thecontract administrator. The programme should be updated to record actual progress andany extensions of time granted. Applications of extensions of time relating to events orcauses of delay for which the employer has assumed risk and responsibility should bemade and dealt with as close in time as possible to the event that gives rise to theapplication for an extension of time.

The parties should attempt so far as possible to deal with the impact of employer riskevents to mitigate its effect on the works as the work proceeds, both in terms of extensionof time and compensation.

The extension of time should be granted to the extent that the employer risk event isreasonably predicted to prevent the works being completed by the agreed completiondate, taking into account the float other than terminal float (difference between plannedand contractual completion) that is available on the activity paths affected by the delay.

The granting of an extension of time does not automatically lead to entitlement tocompensation. Where practicable, the total likely effect of variations should be pre-agreed to arrive if possible at a fixed price of a variation based not only on the directcosts (labour, plant and materials) but also the time related costs, an agreed extensionof time and the necessary revisions to the programme.

Compensation for prolongation should be based on the actual additional cost incurredby the contractor and evaluated by reference to the period when the effect of theemployer’s risk event was felt and to the extended period at the end of the contract.

Points can be assigned to each of the 21 core principles to a particular form of contract to gagewhere each of these forms of contract sit with respect to these principles i.e. -1 for non-compliance; 0 for some compliance; 1 for partial compliant and 2 full compliant. Based on thisrating, the FIDIC Red Book (1999) has a moderate correlation (> 0,5 but ≤ 1,5), while the NEC3ECC has an excellent fit ( >1,5).

C2.3 Potential for collaborative working

Outturn price and not tender price is what matters in construction projects. Outturn cost andbetter value for money is affected by a number of factors including:

collaborative working which has the potential to drive down cost and waste throughcontinuous improvement, team working and joint problem solving and how contractualrisk relating to delays and disruptions are handled;

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long term relationships (repeat business) within which mutual trust and understandingcan develop as well as efficiencies in working together, which in turn helps to reduceconflict and accelerates the process of finding ways to overcome difficulties;

early contractor involvement to enable design integration to take place using the projectteams collective wisdom in order to provide higher value and less waste.

Collaborative relationships work best where there is true risk sharing and incentives for theparties to the contract to perform. Target cost contracts can be used to provide such incentives.Such contracts can also be used to enter into a framework contract over a term where thescope of work is ill defined as the cost parameters (fees for overheads, profit etc, pertinentstaff rates, equipment rates etc) can be agreed for the term and the target price agreed whenthe scope of work is known.

The NEC3 ECC is without a peer when it comes to the promotion of collaborative relationships.It is a form of contract which requires the parties as well as the project manager and supervisorto act as stated in the contract and in a spirit of mutual trust and co-operation. It separates theduties of the project manager who is responsible for time and cost from those of the supervisorwho is responsible for quality aspects of the contract, integrates risk management with projectmanagement procedures, requires that a risk register be opened and maintained and refersdisputes to an independent adjudicator for rapid resolution. It furthermore makes provision forthe payment of financial incentives for the attainment of key performance indicators. (TheFIDIC (1999 and 2017} forms of contract are an improvement upon the JBCC 2000 PBA andGCC 2010 in this regard, but fall far short of the NEC ECC provisions for collaborative working).