C - Procurement and Tendering Flashcards
What is Procurement?
Relates to how the services of a contractor are purchased
What is Tendering?
Relates to how the successful contractor is ultimately selected
What Australian Standard provides guidance to tendering practices?
AS 4120 - 1994 Code of Tendering
What is the purpose of the Code of Tendering?
To encourage high ethical standards in tendering in the construction industry.
It imposes an obligation on all parties to refuse to condone unethical behaviour by others in the industry.
What is a procurement strategy?
Entails weighing up the benefits, risks and financial constraints of a project which will be reflected in the choice of contractual arrangements
What is required to determine the most appropriate procurement strategy?
QS must identify the client’s attitude to risk in the following areas:
1) Time
2) Cost
3) Quality
The following should be addressed:
- What are the risks?
- What will their impact be?
- What is the likelihood of the risks occurring?
- Who will be responsible for the management of the risk?
What considerations should be addressed when selecting a procurement route?
Clients attitude to the following:
1) Exposure to financial uncertainty
2) Requirement of control over the design & construction
3) Extent of design information at tender
4) Required extent of involvement of contractor / supply chain
5) Distribution of risk, responsibility and accountability
6) Client resources and knowledge
7) Complexity of the project
8) Timing of the project
What are the most common procurement routes?
1) Traditional
2) Design and Construct
3) Management Contracting
4) Construction Management
What is Traditional procurement?
1) Design is completed before going to competitive tender
2) Main contractor is employed to build what the designers have specified
When may Traditional procurement be appropriate?
1) If the Client has had the design prepared
2) If the design is substantially completed at the time of contractor selection
3) The client wishes to retain control over the design and specification
4) Cost certainty at start on site is important
5) The shortest overall programme is not the Client’s main priority
BENEFITS IN COST & QUALITY AT THE EXPENSE OF TIME
What is the risk profile of Traditional procurement?
Contractor
- Responsible for the financial risk of the construction of the Client’s design, for a fixed fee within an agreed contract period
Client
- Responsible for the performance of the design team
What are the advantages and disadvantages of Traditional procurement
ADVANTAGES
- Simple, well defined and understood process
- Obtains the most competitive price
- Client retains design control
- High level of cost certainty before commencement
- Changes are reasonably easy to arrange and value
DISADVANTAGES
- Longer overall project duration
- No Contractor input into design and planning
- Dual point of responsibility
- Quality dependent on the appointed design team
What is Design and Construct procurement?
Where the Contractor is responsible for the design, planning, organisation, control and construction of the works to the Employer’s requirements
When may Design and Construct procurement be appropriate?
1) Where there is a need to make an early start on site - design and construction phases can overlap
2) Where the Client wishes to minimise their risk - not responsible for design
3) For technically complex projects - benefits of Contractor expertise
4) Where the employer does not want to retain control over the design development
BENEFITS IN COST & TIME AT THE EXPENSE OF QUALITY
What are the advantages and disadvantages of Design & Construct procurement?
ADVANTAGES
1) Single point of responsibility for design and construction
2) Reduced project duration
3) Benefit of Contractor’s experience harnessed during design
4) Early price certainty
DISADVANTAGES
1) Client may have difficulty preparing a sufficiently comprehensive brief (Employer’s Requirements)
2) Client has to commit to a concept design early
3) Variations from the original brief are difficult to arrange and often expensive
4) Harder to compare tenders
5) Ease of fabrication may be prioritised over quality
What is Management Contracting?
A management contractor is employed to contribute their expertise to the design and manage construction and is paid a fee for doing so.
Project is split into works packages which are individually let through the Management Contractor
How does Management Contracting work in practice?
1) The management contractor has direct contractual link with all ‘works contractors’ - Client’s contractual link is to the management contractor, not the works contractors.
2) Management contractor has the responsibility for the construction works, without actually carrying out the works
3) Client employs the design team
4) Not all of the design needs to be completed before the first works contractors start work
5) MC selects the works contractors through competitive open book tendering
6) The client reimburses the cost of these packages to the MC plus their fee
7) The MC’s risk is low - they get prime cost plus a fee
When may Management Contracting be appropriate?
1) Where the Client is not prioritising cost certainty before commencement
2) When an early start on site is the priority
BENEFITS IN TIME & QUALITY AT THE EXPENSE OF COST
What are the advantages and disadvantages of Management Contracting?
ADVANTAGES
1) Overall project duration is shorter
2) Contractor contributes to the design and planning process
3) Changes can be relatively easily accommodated into packages not yet let
4) The works are let competitively at current market prices on a firm price basis
5) Client retains design control
DISADVANTAGES
1) Increase financial risk to the Client:
a) Management Contractor is paid a fee and does not take project cost risk - Client is exposed
b) Cost certainty is not achieved until the final package is let
2) Changes in the design of later packages may affect packages already let
3) Although procurement is fast, time certainty is poor until the final package is let
What is Construction Management
The Client places a direct contract with each of the trade contractors and utilises the expertise of a construction manager, who acts as a consultant to co-ordinate the contracts.
How does Construction Management work in practice?
1) Trade contractors directly contracted to the Client to carry out the work
2) Construction Managers supervise the construction process and co-ordinate the design
3) CM has no contractual link with the trade contractors, or members of the design team
4) The CM role includes preparation of the programme, determining requirements for site facilities, breaking down the project into suitable works packages, obtaining and evaluating tenders, co-ordinating and supervising the works
When may Construction Management be appropriate?
1) Large, complex projects where the advantages of the Construction Manager can be put to use
2) Where early start on site is key
3) Flexibility in design, procurement and construction strategy
4) Where price certainty before commencement is not key
5) Where the Client is experienced in construction
BENEFITS IN TIME & QUALITY AT THE EXPENSE OF COST
What are the advantages and disadvantages of Construction Management?
ADVANTAGES
1) Overall project duration is shorter
2) Construction Manager can contribute into the design and project planning process
3) Roles, risks and relationships for all parties are clear
4) Changes in the design can be accommodated without paying a premium
5) Prices may be lower due to direct contracts with trade contractors
6) Client has means of redress to trade contractors through direct contractual links
7) Client maintains design control
DISADVANTAGES
1) Increased financial risk to the client
a) Construction Manager does not take project cost risk - Client is exposed
b) Cost certainty is not achieved until the final package is let
2) Changes to the design of later packages may affect packages already let which would make the change expensive
3) Need an informed, pro-active client - all parties report to them
4) Client has a lot of Consultants and Contractors to deal with - not just one - more fees and more time
5) Although procurement is fast, time certainty is poor until the final package is let
What is the difference between Management Contracting and Construction Management?
MANAGEMENT CONTRACTING
- Client has contract with Management Contractor only
- Management Contractor is in direct contractual relationship with the trades contractors
CONSTRUCTION MANAGEMENT
- Client has direct contractual relationship with all trades contractors
- Construction Manager does not have a contractual relationship with the trades contractors
What is a lump sum contract?
A fixed price contract where contractors undertake responsibility for executing the complete contract work for a stated total sum of money
Provides the client with cost certainty
The better defined the works when the contract is agreed, the less likely that the contract sum will change
When is a lump sum contract appropriate?
Where the project is well defined, tenders are sought and significant changes are unlikely
Contractor can accurately price the works they are being asked to carry out
When is a lump sum contract less appropriate?
Where the nature of the works are not well defined
Other forms of contract may be more appropriate such as measurement contracts, cost reimbursement contracts or target cost contracts
How can the cost of a Lump Sum Contract change?
1) Variations
2) Relevant events (Compensable Cause - AS4000)
3) Provisional Sums
4) Fluctuations
5) Statutory fees
When is a measurement contract or re-measurement contract used?
In situations where the design can be described in reasonable detail but the amount cannot
It should be possible to describe the works in sufficient detail to determine a programme and obtain rates from tenderers. Typically these rates are based on drawings and approximate quantities
The actual contract sum is not determined when the contract is entered, it is calculated on completion based on ‘re-measurement’ of the actual work carried out and the tendered rates
Rarely used, other than on civil engineering project
What are the advantages of a measurement / re-measurement contract?
- Allows early start on site, before the design is complete
- Allows changes to the works to be made easily
- Competitive pricing can be sought
What are the disadvantages of a measurement / re-measurement contract?
- Client risk - cost of the works are unknown, Client takes risk for all unknowns
- Whilst competitive prices are obtained, the level of uncertainty is high.
When is a cost reimbursable contract / cost plus contract / prime cost contract used?
When an early or immediate start on site is required, even if design information is not complete
This form of contract is not typically recommended, although it is useful in particular circumstances where an immediate start is required e.g urgent repairs
What is the process of preparing a cost plus contract?
1) Tender proceeds based on an outline specification, any drawings and an estimate of costs
2) The contractor is paid the prime cost (actual cost of labour, plant and materials) and a fee for overheads and profit
3) The ‘fee’ can be agreed by negotiation, competition and can be a lump sum or a percentage of the prime cost
What are the risks associated with cost plus contracts?
- High risk for the Client
- Relies on the Contractor working efficiently and procuring the sub-contracts economically
- sub-contracts may be procured competitively but there is little incentive for the Contractor to procure or select economic bids
- Some of these difficulties can be mitigated if a partnering relationship has been established between the Client and the Contractor
What is a target cost contract?
- Generally associated to cost-reimbursable contracts
- They introduce a mechanism for the Contractor to share in the benefits of cost savings, but also bear some of the Client’s costs when there are cost overruns
- Can be an effective way of ensuring good collaboration
What is the process of establishing a target cost contract?
- Target cost is typically set early in the project
- The aim is to provide a financial incentive encouraging cost control, rather than to penalise
- Bonus and penalty payments are usually capped
- Target costs can be set for the overall project, or specific elements of the work
- Use of a target cost requires that the Client has sufficient knowledge and experience to be able to accurately estimate the likely cost of the works and to negotiate effectively with the contractor
