Whichever procurement type is adopted by the contracting parties it is essential to bear in mind both the advantages and disadvantages of each strategy so that informed decisions can be made prior to project commencement, warns JOANNE EMERSON.
It is essential to weigh up the strengths and weaknesses of different project procurement strategies because establishing an appropriate strategy at the earliest stages of the project can often mean the difference between success and failure. Some procurement routes will be unsuitable for certain types of projects and certain types of owners/sponsors. Familiarity with standard construction procurement strategies can greatly assist in the understanding of the different legal, financial and commercial opportunities that each strategy can provide.
A number of different construction procurement strategies are identified below together with some of their relevant risks and benefits:
Construct only – This type of procurement strategy is often referred to as “traditional or lump-sum contracting”. The owner/developer will directly and separately engage the construction contractor (pursuant to a construct only contract) and the design consultants. There is the additional administrative burden of managing separate contracts (that is, the owner/developer bears the integration risk) and no single point of responsibility for design and construction. The design phase must be completed prior to tender. The contractor then tenders a lump-sum price for the construction of the entire works. If the design is incomplete at the commencement of construction, the owner/developer runs the risk of claims by the contractor for variation costs and extensions of time for each design adjustment or clarification. The contractor will not provide any design or fitness for purpose warranties and the owner/developer can face difficulties allocating responsibility for defects (which can often be a combination of construction and design issues). However, the contract sum for construct only procurement can be significantly less than under a design-and-construct project.
Design and construct – Under the strategy, the owner/developer engages a contractor to design and construct the works. Usually, the owner/developer provides a brief (the “employer’s requirements’) to the contractor which may be high level or detailed. The contractor then provides a tender price for the completion of the design, obtains all requisite approvals and undertakes the construction of the project. Procurement through design and construct offers the owner/developer a single point of responsibility and shorter completion programmes. However, as a consequence of this, the contract price for design and build is often higher than the sum of separate design and construction work, because the design and construct contractor will add a premium for taking integration risk. Moreover, the owner/developer loses control over the quality of the design and specification of the project as the contractor is inclined to try to improve his margins by cutting costs wherever possible.
Sub-sets of this procurement strategy include design, construct and commission (suitable for plants and complex facilities), design, construct and finance (whereby the contractor not only designs and constructs the project, but also takes responsibility for financing the project) and engineer, procure and construct (EPC), whereby the contractor performs the engineering design and then engages and manages equipment vendors, specialist consultants and trade contractors. These procurement strategies are generally suitable for large-scale heavy engineering facilities and manufacturing plants.
Construction management – Here, the owner/developer enters directly into contracts with specialist trade contractors, which are managed or overseen by the construction manager. The construction manager is engaged by the owner/developer as its adviser under a consultancy services agreement. The owner/developer pays the cost of the trade contracts as well as a management fee for the construction management services and engages the design consultants separately to prepare a detailed design. The construction manager usually oversees and monitors the whole of the construction project, from the tender process through the design phase to the actual construction of the works. As each trade package is let separately, construction management can accommodate a high level of flexibility in relation to the design and construction phases of a project and is considered to offer “fast track” procurement due to the benefits of a compressed design and construct programme. The employer has the opportunity to control the budget closely – balancing cost overruns in one package by making cost savings in another. It is considered unsuitable for inexperienced owners/developers because it leaves all the cost risk of the procurement with the employer and requires him to engage closely with the design and construction process from start to finish.
Moreover, the construction manager will typically not accept liability for delays, cost overruns or quality (except where such delay, overruns and quality issues are directly caused by the construction manager’s negligence). The final cost of the works is only known once the trade packages have been let and this can create problems for owners/developers who need to obtain fixed funding for the project.
Management contracting – Often confused with construction management, this strategy involves the owner/developer entering into an agreement with a management contractor who, in turn, contracts with the individual trade contractors. The owner/developer pays the cost of the works contracts as well as a management fee for the management services. The final cost of the works is only known once the works packages have been let. While the management contractor can be engaged during the design phase to advise on buildability, sequencing and procurement, the owner/developer will separately engage the design consultants and generally bear the integration risk between the design and construction phases. Moreover, the management contractor can become no more than a “post box” between the owner/developer and the works contractors and has no incentive to keep the management or works contractor’s costs down (although costs are generally controlled through a cost plan which is agreed between the owner/developer and the management contractor at the commencement of the project). Management contracting does, however, allow fast-track procurement by allowing the first packages to be let while design is still in progress and it can accommodate flexibility for design changes.
Partnering – This is a method where an owner/developer and a contractor agree to work together by freely sharing resources, risks and knowledge during the course of the project. This type of project procurement can be distinguished from more traditional strategies by collective performance of obligations by the owner/developer and contractor, open-book payment arrangements, decision-making by consensus, a commitment to resolve disputes without resort to litigation and non-traditional allocation/sharing of risks between participants.
The advantages of partnering are increased opportunities for cost saving by continual improvement, lack of an adversarial atmosphere, cultivation of good public relations and increased prospects of repeat business, incentives for innovations and improved cost, time and quality outcomes. However, partnering is not an easy solution. It requires commitment, discipline and trust and can demand significant adjustments in the relative, traditional positions of an owner/developer and a contractor.
PPP/PFI – Public Private Partnerships or Privately Financed Initiatives are procurement methods by which a government entity and a private sector company form a partnership for the purposes of providing public infrastructure, community facilities and related services. PPP/PFIs are becoming increasingly popular for the construction of large infrastructure projects.
There are various types of PPP/PFI, which involve differing levels of private sector involvement. Examples include projects where the private sector operates and maintains a publicly-owned facility, the private sector finances the construction of a publicly-owned facility or the private sector designs, constructs and maintains a publicly-owned facility. The two parties enter into a concession agreement under which the private sector consortium is permitted to provide a public service over a period of time for a certain cost to the public.
The benefits of PPP/PFI procurement are twofold: they allow the public sector to continue or introduce new public facilities without directly bearing the capital costs of doing so and the private sector can often provide public facilities and services cheaper, faster, more efficiently and at a higher quality than the public sector can. PPP/PFIs have recently come under scrutiny, however, due to the public’s perception of privatisation of, and profiteering from, the delivery of public services.
Whichever procurement type is adopted, it is essential to bear in mind both the advantages and disadvantages of each strategy so that informed decisions can be made prior to project commencement. Procurement can be sensitive to the capabilities, resources and experience of the owner/developer and therefore owner/developers should be honest about these issues from the outset. Bankability and risk allocation should also be key factors in procurement selection. Finally, regardless of which type of procurement is selected, owner/developers must be mindful that procurement is only as successful as the counterparty contractor; at the end of the day, the contractor’s ability to deliver in accordance with the procurement strategy will be imperative to the success of the project.
Gulf Construction