UK: Procurement Options For Your Middle East Project

Last Updated: 27 March 2015
Article by David Savage

1 WHAT IS PROCUREMENT?

Procurement in general refers to the process of obtaining a product or service. Specifically in the construction industry, it means the way in which the responsibilities for design and construction of a construction project are allocated, including the risks and responsibilities associated with the project.

There are several procurement options available, each with its own advantages and disadvantages. It is therefore vital to identify the client's key requirements in order to identify which procurement routes would be best suited for a particular project.

The key client requirements to consider are:

1.1 time;

1.2 price; and

1.3 quality.

In addition to those three major factors it is useful to consider the value, size and nature of the project as well as the experience and expertise of the project team.

2 PROCUREMENT ROUTES AND OPTIONS

The main procurement routes are:

2.1 Traditional

The key element of the traditional procurement route is that the design function is kept separate from the construction of the project. The employer engages a professional team to design the works and a contractor to execute that design (see Figure 1).

The same professional team will administer the building contract on behalf of the employer.

The employer's design team is usually responsible for all design of the project and the contractor carries out the development in accordance with the supplied design. There is a clear division of risk between the employer and the contractor, with the design team being responsible for design and the contractor being liable for construction. The architect will generally fulfil the role of project manager responsible for endeavouring to achieve the time, cost and quality requirements of the project.

Advantages:

2.1.1 certainty of design as all the detailing should be worked out by the professional team prior to the contractor pricing the works;

2.1.2 employer retains control of design (but bears risk of errors and omissions in tender information);

2.1.3 with the contractor building to a complete design, it should be easier for the employer to minimise time and cost overruns;

2.1.4 there should be greater certainty in the fixed building contract price as the design is already completed before construction;

2.1.5 as the contractor has limited or no input into the design, traditional contracting may be particularly suited for luxury projects as the contractor does not have the discretion to institute design changes in order to save on costs.

Disadvantages:

2.1.6 takes longer than other forms of procurement as limited scope for overlapping design and construction;

2.1.7 design risk (i.e. the cost of any design changes required) lies with the employer;

2.1.8 little incentive to the contractor to point out any problems or missing information prior to signing of the contract, as the contractor is likely to be able to claim additional fees and an extension of time in respect of any variations;

2.1.9 there is less flexibility for the employer to institute design variations once construction has begun and, generally speaking, the overall timescale from design stage to completion of construction is likely to be longer than the alternatives;

2.1.10 variations by the employer during construction may increase costs;

2.1.11 adversarial – "them and us" syndrome between contractor and professional team;

2.1.12 lump sum approach encourages contractors to "bid low and claim high";

2.1.13 split design responsibility – often difficult to allocate blame.

2.2 Design & Build

The contractor will carry out the design of the project and submit a price for meeting the 'employer's requirements' for the building. Normally the professional team produce the employer's requirements and then either the contractor employs his own professional team (see figure 2.) or the employer's professional team are novated to the contractor (see figure 3.)

Commonly the contractor is made responsible for all design and construction in the project, referred to as "single-point responsibility".

Design and build is frequently used for budget and business developments (where the highest level of quality is not required) as it offers the benefits of cost and programme certainty. However, the employer will have less opportunity to control development once construction has begun.

Design and build contracting is occasionally referred to as "package" or "turnkey" contracting. This is slightly inaccurate as a true package or turnkey contract is generally considered to be one where the employer has little or no input into the design. This route should perhaps be avoided unless an employer is highly experienced.

The employer needs to fully understand the risks involved and ensure that these are allocated and documented accordingly. Whichever procurement route is chosen, strong teamwork will be required for the development to be designed and built to budget and schedule, and in accordance with performance objectives.

There is a tension between over-detailed specification (undermines the ability of contractor to propose economic solutions) and the need for quality control (risk that the contractor will cut corners and provide the minimum quality required to meet the brief).

Advantages

2.2.1 one point of contact (and responsibility) for the project;

2.2.2 greater price certainty;

2.2.3 popular with funders due to single point responsibility;

2.2.4 design and build imposes a discipline, not least on the employer, to define the brief fully at an early stage. Given this, the advantages of overlapping design with construction can lead to a shorter duration;

2.2.5 given the higher degree of co-ordination at an earlier stage, through the single point of responsibility, variations during construction tend to be fewer and the risk of post contact price escalation reduced;

2.2.6 the design risk lies with the contractor;

2.2.7 brings the skills of the contractor to the design; ECI etc

2.2.8 in terms of liability for defects, the employer need not establish who is responsible for the defect nor whether or not the defect stems from defective design or construction. The contractor will be liable. It is therefore a relatively low risk process for the employer;

2.2.9 it is useful for:

  1. standard building types (e.g. industrial or warehouse use) and particularly where early return on capital investment outweighs considerations of design excellence and capital cost;
  2. buildings using proprietary systems where the manufacturer of the system might well become the main contractor e.g. repetitive housing or low cost hotels based on assembly of factory pods; and
  3. building types in which some contractors have become specialist e.g. highly serviced laboratory buildings.

Disadvantages:

2.2.10 tends to be more expensive – contractor will charge a premium for accepting the design risk;

2.2.11 expensive to change once brief fixed;

2.2.12 design and build, by its very nature, is a rigid system, which does not allow the employer the benefit of developing requirements and ideas, despite the facility for accommodating variations;

2.2.13 where several tenders are invited, comparison of these can be difficult, as the end product in each case is different and the final choice will be influenced by subjective judgement;

2.2.14 any variations required by the employer, after signing a contract, can prove expensive and difficult to evaluate as the employer is one stage removed from the designers. Because of this, the contract is less suitable for an employer who is not quite sure what the finished building should be like and may want to make changes;

2.2.15 there is always a risk with regard to the quality of work. If the original brief is not precise and the specification offered by the contractor equally vague, there is a temptation for the contractor to reduce standards – the contractor is incentivised to construct the works as cheaply as possible;

2.2.16 where the design team's appointments are novated to the contractor, conflicts of interest (between the professional team and the employer and the professional team and the contractor) can arise;

2.2.17 following novation of the design team's appointments to the contractor, the employer has no direct input for checking or improving quality unless he appoints other consultants;

2.2.18 some design and build contracts are qualified in some respects (e.g. ground conditions or the inclusion of provisional sums) which, to a certain extent, can negate the employer's ideal of an early known financial commitment;

2.2.19 the contractor will usually seek to uplift its price for the risk it is taking. This can be managed by providing as much information as possible to the contractor and working up the design pre-tender;

2.2.20 the form is less suitable:

  1. where architectural quality is of overriding importance;
  2. where an employer requires a building tailored to his special requirements;
  3. where there are complex planning or environmental issues;
  4. where complex refurbishment or conversion work (particularly of historic buildings) is required, as the exact scope of the building works cannot be defined until the structure has been opened up with frequent or unexpected variations often arising thereafter;
  5. where the brief cannot be defined, or the building function is of great complexity, so that a protracted period of research and investigation is necessary at the outset and might continue once work has commenced.

Two-Stage Design and Build

In 'two-stage design and build', the contractor is initially appointed on a pre-construction services agreement to assist with the preparation of the employer's design. The main contract is then re-tendered.

Advantages:

2.2.21 the contractor's design skills and experience can be brought to the project at an early stage;

2.2.22 minimises the contractor's risk as it has an opportunity during the pre-commencement period to influence the design and to identify and price risks;

2.2.23 attracts contractors' interest in projects while still allowing a firm price to be agreed - some contractors will not tender for one-stage design and build projects.

Disadvantages

2.2.24 additional cost;

2.2.25 element of competition lost as the contractor initially appointed is usually retained for the second stage.

Design and Build – contract choices:

2.2.26 JCT Design and Build Contract 2005 (Revision 2, 2009) – still most used, benefit of familiarity;

2.2.27 JCT Major Projects – more control handed to contractor, which employer may want;

2.2.28 NEC3 – this contract is not designed to make the contractor a single point of responsibility – it will require amendment to achieve this.

2.3 Construction Management (only recommended for experienced employers)

The work is divided into several 'packages', each of which will be a separate trade contract with the employer.

The employer will employ a construction manager to manage the various packages of work and directly engage trade contractors to carry out each trade contract package (see figure 4.).

A construction manager is tasked to ensure that the development is designed and completed. The construction manager is responsible for instructing and co-ordinating the professionals and the trade contractors.

This form of procurement is generally only used on projects where there is a shortage of time and it is important that the contractors commence work on site as soon as possible.

2.4 Management Contracting (only recommended for experienced employers)

Management contracting is a variation of construction management where a management contractor (rather than a construction manager) employs the trade contractors, with the professionals being retained by the employer.

The work is divided into several 'packages', each of which will be a works contract. The works contractors enter into contracts with the management contractor (see figure 5.) However the management contractor is not directly responsible for default by the works contractors.

The management contractor is paid a fee plus site set-up (organisation) costs. The management contractor is engaged early on to advising on programming, buildability, packaging of work etc.

Advantages for CM and MC:

2.4.1 for the contractors only, arguably the most risk-free form of construction;

2.4.2 the professional team will focus first on the design of the early packages, so those packages may be let and the work executed whilst the design for later packages is progressed. This means an early start on site and more flexibility;

2.4.3 an employer can emphasise quality as it has the flexibility to instruct changes throughout the development and it allows for early commencement of construction since the development does not need to be fully designed in order to let early work packages. As each package of works is being tendered to specialists by the employer, construction management should lead to the lowest development cost;

2.4.4 potentially cheaper as there is no main contractor profit.

Disadvantages for CM and MC:

2.4.5 high risk for employer - the risk of interaction between the packages and design risk lies with the employer;

2.4.6 there is less cost and programme certainty – the final price will not be known until the final account of the last trade contract;

2.4.7 much more administration for the employer;

2.4.8 less popular with funders;

2.4.9 employer bears ultimate risk of insolvency or default by works contractors / trade contractors;

2.4.10 for MC only, management contractor obliged to pursue defaulting works contractors, but liable only to the extent of recovery;

2.4.11 for MC only, no real incentive for management contractor to act in best interests of employer.

2.5 Bespoke/ Hybrid Procurement

These are particularly common in international projects particularly in the engineering sector. Examples include EPC procurement, multi-contracting procurement bespoke or hybrid procurement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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