PRM SEM 01 - 13. Procurement

Question 1

Procurement Processes

Answer 1

• Procurement
• Quotes and Estimates
• Monetary Allowances, Prime Cost Sums, Provisional Sums
• Cost Fluctuations and Contingency Sums
• Margins and Mark-ups
• Nominated Sub-contractors and Substitutions
• Tendering and the relevant NZIA Standard Construction Contract sections
• Tender Analysis and Acceptance
• Other Methods of Procurement

Question 2

Procurement: Quotes and estimates

Answer 2

A quote or quotation is a specific promise, bid or offer to do a job for a precise sum of money, generally based on a good understanding of the scope of the job.

Get it in writing.
Check you are agreed on all materials, quantities, details, quality etc. The best quotes are based on good detailed drawings and specifications, and a contract spelling out terms of payment, retentions, timeframe etc. Once accepted it is part of a contract and the builder has a legal obligation to stick to it.

Quotes are generally free.

Question 3

How many quotes is standard to get?

Answer 3

It’s standard to get at least three, to differentiate the highest from lowest. Builders don’t like
quoting when there are four/ five or more as it reduces their chances.

Question 4

What is the general time limit for a quote?

Answer 4

Most quotes have a time limit on them of a month or so

Question 5

Asking builders to break down quotes

Answer 5

Often builders are happy to break-down the quote so you can see where the costs are in terms of labour, materials, different trades, profit etc. The NZIA SCC 2014 (Standard Construction Contract) contract requires a break-down also known as a trade (or tender?) summary

Question 6

Ethics on using quotes as leverage

Answer 6

(Honestly and fairness) Ethically its bad practice to take a quote and use it as leverage to obtain another lower quote
(unfair to the first quoter who has done work, gives inside knowledge/ competitive advantage to
second, and anyway, low price is only one consideration in a quote).

Question 7

Procurement: Estimate

Answer 7

An estimate is a best guess at the cost and is often based on little information eg it might be based on $ per metre2 of floor area without knowing too much about architectural detail or finishes. In common practice an estimate should be accurate to within 10-15% - but in design we wouldn’t rely on one! Builders may give a low estimate to get a job.

Better to get a Quantity Surveyor to do a proper analysis and estimate.

Question 8

“Lowest or any quote/ tender not necessarily accepted”

Answer 8

“Lowest or any quote/ tender not necessarily accepted”. This is frequently stated by an architect obtaining quotes (see T3 point 6 “Acceptance”). It means that the lowest price is not the only consideration - before accepting a quote we would consider the builders experience, reputation, resources, any quality issues, timetable etc. Procurement is about getting a good builder as well as a good price.

Sometimes the lowest quote is from someone who has misunderstood the job or is desperate for
work and we could expect scrimping on quality or constant battles to recoup profit.

There is an old saying in construction: everyone wants it fast, cheap and good - but you only ever
get two out those on a job: if its fast and cheap, it wont be good, if its fast and good it won’t be
cheap, if it’s cheap and good, it wont be fast.

Question 9

Talk about Ethics of using Dave’s son as a builder and landscaper

Question 10

Monetary Allowances and Exclusions: Unresolved details

Answer 10

Reliable quotes come from good drawings, details, specification and contract. However we may not have resolved certain things such as floor finishes or hardware when we put a job out for quote. So we tell all builders quoting to allow a certain lump sum of money to cover that area. This might affect the accuracy of our budget for the job, but at least all quotes can be compared on the same basis.

Question 11

Monetary Allowances and Exclusions: Allowances

Answer 11

Allowances are often underestimated so if a builder doesn’t quote in a certain area or trade, look
very carefully at that cost and try and get it quoted eg its quite common they don’t price for some signage or planting and just allow a sum. As long as these are tagged as allowances in the quote, the actual cost will be passed on to the client.

Question 12

Monetary Allowances and Exclusions: Prime Cost Sums

Answer 12

The NZIA SCC (Standard Construction Contract) in Section 10 Monetary Allowances has more
information including defining allowances as:

Prime Cost Sum: also known as PC sums: price for materials only, with contractors cost and
profit, but not including labour.

Question 13

Monetary Allowances and Exclusions: Provisional Sum

Answer 13

Provisional Sum: everything: materials, labour and contractors cost and profit.

These are listed in Section B1 of the Schedules, in the NZIA Standard Construction Contract (SCC)

Question 14

Monetary Allowances and Exclusions: Exclusions

Answer 14

Sometimes a builder does not quote or allow for an item and this is called an exclusion, however
it must be tagged otherwise we can assume it is covered in the quote. It is very common to
exclude rock from earthworks as the builder has no idea if it is there or not, so the cost of
breaking or removing rock obstructing foundations is extra. Always check a quote for tags. Ask
the builder if there are any tags.

A quote can not be expected to cover other unforeseen costs (eg the discovery of asbestos or
inadequate structure in an alteration) and unforeseen events (eg floods).

Question 15

Monetary Allowances and Exclusions: GST!

Answer 15

GST should be stated as excluded otherwise we assume it is included. But check: it is very
common in the building industry to exclude GST! Assuming GST is included is a very common
mistake (eg when phoning Placemakers about the price of timber).

Question 16

Cost Fluctuations and Contingency Sums:

Answer 16

In times of high inflation a good contract will cover inflation and cost fluctuations.

Section B1 of the NZIA Standard Construction Contract states whether cost fluctuations are
allowed or not. Generally not in most jobs.

Larger, more complex jobs with long timeframes where cost fluctuations are allowed (eg the cost of steel) would be covered by different contractual arrangements (see later). Quantity Surveyors are used to assess these.

A contingency sum (see Section 10 Monetary Allowances), usually 5 to 10% of the cost of
the job, is often added in to the quote at the direction of the architect. This sum is to absorb
the cost of changes, variations (see next lecture Contract Administration), extras,
unforeseen costs etc and ensures the client has budgeted for them.

Question 17

Margin and Mark-up:

Answer 17

A contractor’s margin is their profit. Its quite common to ask what this is and the NZIA SCC Section TS Trade Summary asks for it. It can range from 5 to 15% depending on the size of the company, the scale and complexity of the job and the state of the economy and market.

A large project with a large company often has a lower margin. Small companies often have higher margins.

You can also establish what the builder’s hourly rate for labour is so that you can estimate or breakdown the cost of variations.

A contractor’s mark-up is the price he adds to materials or sub-contracts. He is entitled to this as it covers organisation, coordination, protection, storage and various intangibles (eg if you ask a contractor to purchase a light it will cost more than if you go get it yourself).

Question 18

Preliminary and General:

Answer 18

Often called P&G and itemised at the beginning of a specification or breakdown, this is a fixed cost that the contractor nominates to cover general on and off site costs such as insurance, site security, toilet hire, water and electricity, storage, tools, office and other “overheads” etc. The amount varies between 5 and 15% and big companies on big jobs generally have higher P&G costs than smaller companies. Builders have an incentive to keep it low so it doesn’t inflate their quotes.

Note that the architect generally nominates the value of the insurance the builder must carry
but the cost to them is buried in P&G.

Question 19

Nominated Sub-contractors and Substitutions

Answer 19

Occasionally we want to use a specific sub-contractor eg a paint or painter for a special paint effect.

We can direct the builder to employ that subbie who becomes a nominated sub-contractor.
Sometimes we may specify a product by brand such as GIB board. A contractor may suggest an
alternative, generally of lower cost. If this is acceptable we advise them of that, otherwise generally we have a policy of no substitutions. It therefore is important that we take care in drawings and specifications to distinguish between brand names (gib board, customwood) and generic products (plasterboard, mdf (medium density fibreboard)).

Commonly when specifying colours we use brand names eg Resene “Spring Morning”. The painter should ask before substituting the same colour from Dulux.

Question 20

Tendering:

Answer 20

Putting a job out to tender is the process of obtaining quotes (tenders) from several builders and thus choosing a builder. It is still the most common procurement process for most jobs. It is competitive and involves several builders doing pricing work for free, with a likelihood of just one winning.

We generally want 3 tenderers minimum. its common to invite 1 or 2 more in case a couple drop out.

Builders don’t like to compete with large numbers of tenderers.

We must supply identical information to all tenderers. This should include a drawings, specification etc but also the draft Contract so that they understand the terms and conditions of the job eg payment schedule, timeline etc

We must be scrupulously fair: if one tenderer asks a question, we reply in writing to them as well as all other tenderers and title and number the memo eg “Notice to Tenderers Number 1 “.

Tendering can be open or public (advertised for example in a newspaper or email) or it can be closed or limited (eg to a few invited builders).

We can be selective, and advertise for Registrations of Interest and get builders to submit a cv with their qualifications, experience and even references, then select a few for the actual tender process.

Question 21

The NZIA SCC (Standard Construction Contract) Sections T1 - T5

Answer 21

The NZIA SCC (Standard Construction Contract) Sections T1 - T5
Covers the tendering process:

T1 Specific Conditions: where the architect fills in details.

T2 Special Conditions: (anything modifying the General Conditions, generally nothing)

T3 General Conditions of Tender: the main rules of the process.

T4 Tender Submission Form: that contains the price, acknowledgement of Notices to Tenderers. and acknowledgement that the builder has inspected the site.

T5 Tender Summary: the tender (quote) breakdown/ trade summary (attached to this handout).

Question 22

Tender Analysis and Acceptance

Answer 22

We analyse the trade summary looking for allowances. exclusions and tags.

We also compare trades to see if one tender is vastly different from another in that area. It
could mean they have misunderstood the job, made a mistake or have included work from a
different trade section. Generally there is wide variation in Carpentry because that could
include or exclude all sorts of things.

Generally we ask each tenderer for clarification or to remove tags or provide actual sums
instead of allowances or exclusions they may have put in.

Remember that the lowest price is not the only consideration - before accepting a quote we
would consider the builders experience, reputation, resources, any quality issues, time
frame etc. Procurement is about getting a good builder as well as a good price.

The architect, often with the assistance of a Quantity Surveyor, makes a recommendation to
the client to accept a certain tender.

The client makes the decision and the architect writes a Letter of Acceptance to the
contractor and a contract now exists!

The architect fills out details in the written contract and arranges for the Contractor and
Principal (the client) to sign them (this need not happen in the same physical space).

Question 23

Other Methods of Procurement:

Answer 23

The tender process results in a Lump Sum Contract. It is competitive and aimed at getting a low price, but it can lead to a confrontational relationship with the contractor and quality control issues all through the project if the tenderer has cut corners in pricing the job. Or if we put the job out to tender before finalising all details.

Every change or variation is subject to exploitation and the final price can still be at risk.
Other forms of procurement generally involve negotiating a system with a selected
contractor.

Generally builders like these as they lock into a contract early on.

These are Measurement Contracts where the final price is worked out at completion by a quantity survey process previously agreed, or Cost Reimbursement Contracts where the final price is worked out on the actual cost of labour and materials with a profit and overheads margin added. Open Book is another name for contracts such as these.

These systems may leave the final price up in the air but they allow an earlier start and a collaborative relationship between builder, architect and client. There can be incentives to save money and time. They are increasingly used on large and complex projects. The Guaranteed Maximum Price is a system where the contractor offers a maximum final price, takes on some risks, but can potentially make savings.

The Design Build Contract is very popular in NZ but involves the Architect and the Contractor having a different relationship, often with the Architect employed by the Contractor.

Many Design Build contracts allow for novation of the architect and other consultants. This
is where they start off working for the Client, then work for the Contractor when the Contract
is signed.

The traditional tendering method is still widely used on small, simple and medium sized
jobs, but these other contract models are increasingly used on large and complex jobs.
Many large building firms have website sections that discuss different forms of service and
contract as do project management and legal firms. Attached is an article by law firm Bell
Gully that discusses alternative procurement models.