Procurement & Tendering Flashcards
What is procurement?
The overall act of obtaining goods and services from external sources
What is tendering
Tendering is the bidding process to obtain a price; and how a contractor is actually appointed.
Name the types of Procurement routes?
Traditional
Design and Build
Management Contracting
Construction management
How would a procurement route be decided upon?
Formulate a procurement strategy to achieve optimum balance of risk, control and funding for a project. This would address:
a) The business case
b) Define objectives and measures for success
c) Determine procurement priorities
d) Identify main risks and who is best placed to manage them
e) Any EU rules
Differences between Procurement Strategy and Procurement Route
The procurement route sits within the overall procurement strategy.
The route delivers the project; selects and provides structure to the project team; allocates risk and responsibilities; and determines the form of contract.
The procurement strategy also addresses the Client’s business needs.
The strategy links the project to the Client’s business; balances client risk with control; and reflects client’s objectives and available resources.
What are the advantages of using Traditional Procurement?
- Competitive fairness - all tenders are based on exactly the same information, and there is no interpretation of information.
- Cost certainty - the total cost is largely known at the outset of the contract.
- Programme certainty - the time-frame is established at the outset of the contract.
- Established - this has been the most commonly used route, and is constantly refined.
- Minor changes and adaptations for a specific project are easy to implement, with an established method of valuation.
- The form is capable of conversion to a guaranteed maximum price (GMP).
- The client has a full design they approved
*Early cost certainty is possible - Fairly even split of financial risk
Explain Management Contracting?
The MC manages packages of works, this allows for works to start quickly but there is no lump sum cost provided at the offset. The contractual link sits between the main contractor and works packages.
A management contractor is appointed on the basis of a fixed management fee. The management contractor programmes, packages and obtains tenders for the works, which are each let on a competitive basis on lump-sum, firm-price contracts with the management contractor. The project is split into packages and the client enters into separate contracts with each works contractor
Explain Construction Management?
A fee earning construction manager is appointed to manage the trade packages, but the contract sits between the client and subcons.
What types of projects would a Traditional procurement route be suitable for?
Design led projects where the client is less open to having the contractors interpretation of their requirements.
How do you protect your client from copyright under a 2 stage tender?
Within the PCSA you ensure the inclusion of a copyright clause.
What would the course of action be in the instance of identifying an error in the commercial response of a tender return?
Within the ITT you would specify which alternative the contract will adopt in the instance of an error.
Alternative 1 – Standby their response or withdraw
Alternative 2 – Amend their response or withdraw
When would you advise the client to re-tender?
Consideration must be given to the number of tender responses and if it is still a competition
If you believe the tender procedures have been compromised.
If there has been drastic deviation from the design / VE exercise which significantly differs to the design tendered.
Explain traditional procurement
Client appoints a design team to complete the full design up to RIBA 4 along with the tender documents.
The project is tendered to a number of contractors and the highest scoring contractor after evaluation is appointed
A specialist works are usually tendered during construction
The contractor is responsible for the programme
Disadvantages to traditional procurement
Overall procurement time is slower
Domestic sub-cons are tendered individually so there is a lack of visibility
Contractors expertise is not incorporated into the design
The contractors relationship creates sides
Design must be fully complete before tendering
Key client risks under traditional procurement
- Overall project duration may be longer than others – sequential process
- No input into design and planning by the contractor
- Dual point of responsibility – design team for design and contractor for construction
- If design not complete at time of tender, cost and time certainty are reduced
- If the client continues to request changes to the brief there is risk of cost and programme overrun
Explain Design and build procurement
Design and build is a procurement route in which the main contractor is appointed to both design and then construct the works described in the contract.
- Client appoints a design team to develop the clients brief
- Client tenders to a number of D&B contractors
- Contractor is selected on overall tender including design programme and works
- Contractor build the building and completes it to the programme
- Emphasis in this form of procurement in time and cost. Design and construction are overlapped so the overall project duration is shorter
D&B procurement advantages
- Client has single point of responsibility
- The contractors expertise is used in the design
- Early cost certainty is possible
- Design and construction are overlapped
D&B Procurement client risks & mitigation
• Client may find it hard to prepare a sufficiently comprehensive brief
• Client has to commit to a concept design early
• Variations from the original brief are difficult to arrange and often expensive
• Harder to compare tenders – harder to determine if getting value for money
• Ease of fabrication may be prioritised above aesthetic quality
• May be less real competition due to fewer design and build firms
• End result may not be what the client wanted
When is management contracting suitable to be used?
On unique specialist buildings or where time is critical. The client is normally very experienced in developments.
Explain management contracting.
The contractor manages packages of works, this allows for works to start quickly but there is no lump sum cost provided at the offset. The contractual link sits between the main contractor and works packages.
A management contractor is appointed on the basis of a fixed management fee. The management contractor programmes, packages and obtains tenders for the works, which are each let on a competitive basis on lump-sum, firm-price .
The management contractor programmes, packages and obtains tenders for the works, which are each let on a competitive basis on lump-sum, firm-price contracts with the management contractor. The relationship is between the managing contractor and subcon.
Management contracting advantages?
- Design and construction overlap for a quicker programme.
- Each sub-contract is tendered individually ensuring full competitiveness.
- Management contractor experience is used in the design, specialist subcon also used in the design.
- MC is responsible for delivering the project on programme.
Management contracting disadvantages
- Costs are not fixed at the outset
- There is potential for conflict between subcons ie over delays
- The client involvement is high
Management contracting key risks to the client
- Costs are not fixed at the outset
- Design is not complete at the outset
- The MC is sometimes not responsible for problems with the subcons - i.e the risk of cost increases bourne by the client
- There may be a lack of PI insurance on subcons
- The management contractor is not responsible for design defects due to subcons
Risk mitigation.
- An additional design contingency to the budget to cover any cost increases and carry out due diligence
- Amend the contract so the MC is responsible for programme disputes between subcons
- For PI advisors should insist on moving some subcons into MC’s responsibility
- Ensure that a system of PI with warranties is in place to the satisfaction of legal advisors
Explain the difference between managing contracting and construction management.
Construction management the client owns the contractual relationship with the subcons, management contracting the MC owns the relationship with the subcon.
When is construction management procurement used.
CM is used mainly by US companies, the emphasis in this form of procurement is time. Design and construction is overlapped making overall project duration shorter.
Advantages of Construction management
- Design and construction overlap making overall programme shorter.
- Specialist subcons experience used in the design
- Each subcontract is tendered separately so is competitive
Disadvantages of Construction management
- Costs are not fixed at the offset
- No single point of responsibility
- client assumes a high level of time cost and design
- client involvement is high
- high degree of interface and programming required between design and construction
Construction management key client risks
- Costs are not fixed at the outset
- Design is not complete at the outset
- The CM is not liable for any programme delays, risks of delay and cost increase is a risk bourne by the client
- Lack of PI cover on subcons
- CM not responsible for design defects due to subcons
Mitigation
- An additional design contingency to the budget to cover any increases and carry out due diligence
- Covert appointment to CM with the risk of programme overrun
- For PI advisors should insist on moving some subcons in the CM’s responsibility
- Ensure that a system of PI cover is in place to the satisfaction of legal advisors.
List the financial basis of different types of procurement
- lump sum / fixed price
- cost reimbursable contract
- Target cost contract
- Measurement contract
Explain Lump sum / fixed cost
A single ‘lump sum’ price for all the works is agreed before the works begin, it is the traditional means of procuring construction.
The contractors undertake the responsibility for executing the complete contract for the stated total sum of money.
When would a lump sum contract be most appropriate?
Generally appropriate where a project is well defined when tenders are sought and significant changes to requirements are unlikely. This means the contractor can accurately price the works they are being asked to carry out.
When is a lump sum contract not appropriate?
Lump sum may be less appropriate where speed is important or where the nature of the works is not well defined.
List the mechanisms for varying the contract sum on a lump sum contract
- variations
- relevant events
- provisional sums
- fluctuations
- payments to nominated subcons or suppliers
- statutory fees
- payments relating to the opening up works for inspection and testing
Explain the advantages of lump sum contracts
- client risk is minimal
- fewer variations
- the client can arrange capital according to the payment plan
- the contractors cash flow is predictable
- the tendering process is more transparent and impartial
Explain the disadvantages of lump sum contracts
- Contractors risk is high
- poor details and specs in the design can lead to project disputes & cost increases
- delays in the client financing can delay the project
- the design should be complete and available before the precontract process
- procurement times can be long
When would a measurement contract be appropriate to use?
Can be used in situations where the design can be described in reasonable detail but the contract sun cannot
Explain a measurement contract
The contract sum cannot be determined when the contract is entered into but is calculated on completion based on re-measurement of the actual work undertaken at the rates tendered
Explain a cost reimbursable contract
The contractor is reimbursed for the actual costs they incur in carrying out the works, plus an additional fee.
This is appropriate to use when the nature of the works is not fully defined at the outset and the risk associated with the works is high (i.e emergency works).
This option is high risk for the client as cost is not known when entering into contract.
Example is NEC option E
Explain a target cost contract
Target costs are generally associated with cost reimbursable contracts.
ITs a mechanism allowing the contractor and sometimes consultant to share in the benefits of cost savings but also bear some of the client cost if the project overruns.
Target cost is set early on in the project, then savings are shared based on an agreed formula.
Bonuses or penalty payments are often capped, target costs can be set for the overall project or certain elements of work.
Example NEC Options C & D
What types of projects would a Traditional procurement route be suitable for?
Design led projects where the client is less open to having the contractors interpretation of their requirements.
When would you advise the client to re-tender?
Consideration must be given to the number of tender responses and if it is still a competition
If you believe the tender procedures have been compromised.
If there has been drastic deviation from the design / VE exercise which significantly differs to the design tendered.
What is novation
Novation is a new contract which transfers the rights and obligations of one party onto a new third party, for example the design rights and obligations of the architect are transferred from the client to the contractor.
If the design team novates what should the client put in place
The client should have a collateral warranty with the design team to give them remedies for breach of contract.
If the client wishes to start on site asap, what route would you recommend?
This depends on a other requirements including cost and quality, but if time is the overriding priority then Management contracting or Construction management would be appropriate due to the ability of a fast start on site as the start on site is not dependant on a long tender period.
What procurement route would you recommend if the client wanted an early start on site and also cost certainty?
D&B would be the most appropriate as it allows design and construction to overlap, rather than being sequential like traditional. This route does however allow the client to attain a lump sum for cost certainty.
What is GMP? And what does it mean to you?
Guaranteed maximum price. It’s a lump sum contract where there is no adjustment to the tender price, unless required by the client changes. The contractor includes additional risks involved in the design development process in the tender price.
What are the advantages of GMP?
There’s a greater price certainty as the contractor takes a risk of design development and unforeseen occurrences, there’s greater control over spending, it is within the contractors interest to alert the team to expensive items of design development and there is a quicker settlement of the final account.
What are the disadvantages of GMP?
The client may pay too much, the contractors risk allowance may be higher than in reality, scope changes are likely to be very expensive and it can be adversarial when trying to decide whether they are design or scope changes
What is PFI / PPP?
Private Financial Initiative or Public Private Partnership
What are 3 types of PFI projects?
Financially freestanding / Project undertaken with costs recovered by charging users / Joint Venture public and private sector project
What kind of project would a Private Finance Initiative (PFI) be used on?
Commonly large projects such as schools or hospitals
What is partnering?
It is a different way of structuring a business relationship involving two or more organisations working together to achieve mutual objectives, and deliver continuous measurable improvement
What is project partnering?
Where all members of the team become involved in the partnering process at design stage including contractors. Ownership of risk is spread between the parties and a collaborative approach is encouraged to deliver the solution and overcome problems
What is strategic partnering?
Strategic partnering is a long-term relationship for a number of projects or work that will last over a long period.
What are the key characteristics of partnering?
With partnering there is more trust, extra incentives, administrative burden is increased and therefore restricts it use to larger projects.
What are the benefits of partnering?
- The overall construction and design programme is shortened because there is a prior understanding of the client and the requirements from previous projects,
- the team know each other and learn each other’s working patterns reducing conflict, improve communication and objectives,
- a pooling of resources and ideas which should result in innovative solutions improved customer satisfaction,
- better value for the client
- Recognition and protection of profit margin for contractors and suppliers
- Creates an environment which encourages innovation and technical development
- Improved buildability
- Stability of better confidence of the team
What contracts can be used for partnering?
NEC 3 and Option x12
JCT Framework agreement
NEC framework agreement
What is a Key Performance Indicator?
A measurable value that demonstrates how effectively a company is achieving objectives and performing on a project used to evaluate their progress and success at reaching targets and allows organisations to benchmark performance for areas critical to the project’s success.
