Building Procurement

• The term ‘procurement’ when used in a building

context may be defined as the overall process of
acquiring a building. In order to design, build and
commission a building that delivers the best possible
value for money for the client over its life cycle.
• There are a number of procurement methods a client
may use to acquire these services. These procurement
methods give the client a choice of various
management structures, different contractual
arrangements and varying degrees of client risk.
• The following factors should be considered when
evaluating the most appropriate procurement strategy
• Project characteristics – The size, complexity, location and
uniqueness of the project should be considered as this will
influence time, cost and risk.
• Ability to make changes – Ideally the needs of the client
should be identified in the early stages of the project. This
is not always possible.
• Changes in technology may result in changes being
introduced to a project. Changes in scope invariably result
in increase costs and time, especially they occur during
construction.
• It is important at the outset of the project to consider the
extent to which design can be completed and the
possibility of changes occurring.
• External factors – consideration should be given to the
potential impact of economic, commercial,
technological, political, social and legal factors which
influence the client and their business, and the project
team during project’s lifecycle. For example, potential
changes in interest rates, changes in legislation and so
on.
• Client resources – a client’s knowledge, the experience
of the organisation with procuring building projects
and the environment within which it operates will
influence the procurement strategy adopted. Client
objectives are influenced by the nature and culture of
the organisation. The degree of client involvement in
the project is a major consideration.
• Cost issues – An assessment for the need for price
certainty by the client should be undertaken
considering that there is a time delay from the
initial estimate to when tenders are received.
• The extent to which design is complete will
influence the cost at the time of tender. If price
certainty is required, then design must be
complete before construction commences and
design changes avoided.
• Timing – Most projects are required within a specific
time frame. It is important that an adequate design
time is allowed, particularly if design is required to be
complete before construction.
• Assurances from the design team about the resources
that are available for the project should be sought.
Planning approvals can influence the progress of the
project.
• If early completion is a critical factor then design and
construction activities can be overlapped so that
construction can commence earlier on-site. Time and
cost trade offs should be evaluated.
• Risk Management-The choice of procurement
route will affect the extent to which a client is
exposed to risk.
• Many clients need to know at the
commencement of the procurement process a
fairly accurate cost or an expected completion
date, others will wish to ensure that their
project will meet their functional need.
• Quality and Performance
• If quality and performance are particularly
important the client will probably want to keep
direct control over the development of the design
• This can be achieved by employing the design
team directly, or by developing carefully written
and precise performance specifications,
supported by performance measures for both the
completed building and its principal functional
components
 Traditional Procurement
• In the traditional approach, the employer
accepts that design work will generally
separate from construction, consultants are
appointed for design and cost control, and the
contractor is responsible for carrying out the
works.
• There are three types of contract under the
traditional procurement method:
• 1. Lump sum contracts - where the contract sum
is determined before construction starts, and the
amount is entered in the agreement.
• 2. Measurement contracts – where the contract
sum is accurately known on completion and after
re-measurement to some agreed basis.
• 3. Cost reimbursement – where the contract sum
is arrived at on the basis of the actual costs of
labour, plant and materials, to which is added a
fee to cover overheads and profit.
• The traditional procurement method
organisation chart
 Lump Sum Contracts
• Lump Sum contracts will include the Bills of firm quantities, bills of
approximate quantities, drawings and specification
• The contractor undertakes to carry out a defined amount of work in
return for an agreed sum.
• A. Bills of Firm Quantities
• This is the scenario where the employer commissions an architect to
prepare the design. Once the design is complete, the Quantity
Surveyor prepares a Bills of Quantities based on the architect’s
drawings and specification information.
• Contractors are invited to price the bills of Quantities and submit the
tenders in competition for carrying out the work. Here the
contractor with the lowest tender is usually awarded the contract.
• The essential characteristics-
• (i) that both the quantities and the unit rates in the bill form part of
the contract and
• (ii) that virtual completion of the design precedes the signing of the
contract
• Advantages
• Bills of firm quantities avoid the need for all of the
tendering contractors to measure the quantities
themselves
• The detailed breakdown of the contract sum permits
proper financial management of the contract e.g
valuing variations
• All tender on the same basis
• Disadvantages
• The length of time taken in the design of the project
and in the preparation of the bills of quantities.
B. Approximate Quantities
• This method is largely similar to the preceding one,
except that the quantities given in the bill are
approximate only and are subject to later adjustment
there are circumstances where approximate quantities
are necessary where-
• Time is of importance and the general design has been
formulated
• With work below ground, the information is likely to be
too imprecise for the preparation of accurate
quantities
• Essential characteristics
1. That only unit rates form part of the contract
2. The signing of the contract and the beginning of work
on site may proceed before the design is complete
• Advantages
• Construction on site may begin earlier.
• Disadvantages
• The bills of quantities cannot be relied upon as giving a
realistic total cost at tender stage and in consequence,
the parties to the contract are less certain of the extent
of their commitment.
• The construction works have to be measured
completely as actually carried out.
• The architect may feel less pressure to make design
decisions which ought to be taken at an early stage.
• C. Based on drawings and specification
• No bills of quantities are supplied to tenderers
who have to prepare their own quantities from
the drawings provided to come up with the total
cost
• The contractor submits to the employer a fixed
tender sum for the works. This procedure is
intended to be used for relatively small works and
for subcontract works, although it is unknown for
quite large projects to be tendered for on this
basis.
• Essential Characteristics
• That tenderers are supplied only with
complete working drawings and a full
specification and
• That virtual completion of the design must
precede the signing of the contract
• Advantages
• The time required for the preparation of
tender documents is reduced as the time
consuming process of preparing bills of
quantities is eliminated
• Both parties can have a clear picture of their
respective commitments at the time of signing
the contract
• Disadvantages
• No breakdown of the tender sum is immediately
available(although the tenderers may be asked to
provide a Contract Sum analysis either as a part
of their tender submission or subsequently) and
thereby ineffectively comparing and evaluating
tenders
• The valuation of variations presents problems as
indicated above
• In accurately evaluating work in progress for
payment
 Measurement Contracts
• A particular advantage arising from its use is that it allows
for a contract to be signed and work to start on site when
the design is only in outline form, and in consequence the
pre-contract period is reduced considerably.
• This is where the work which the contractor undertakes to
do cannot for some good reason be accurately measured
before tendering.
• Best suited for maintenance and repair contracts
• The contractor is generally required to insert rates in the
schedule for the listed items of work, or alternatively, the
rates may be inserted by the employer and the contractor
then enters a percentage which he requires adding to or
deducting from each item or trade
• (i) Standard Schedule
• A standard schedule lists under appropriate trade
headings all the items likely to arise in any
construction project, with a unit rate against each
item.
• Tenderers are asked to tender percentage
additions(deductions) to the listed rates, usually
by sections or subsections, thus allowing for
variations in construction costs since the date of
the preparation of the schedule used.
• Advantage
• Tenderers using a particular schedule soon become
familiar with the item descriptions and the rates, and
are able to assess percentage adjustments relatively
easily
Disadvantages
In comparing and assessing a range of tenders, the
surveyor has the task of gauging the effect of a series
of variables , making the choice of the most favourable
tender difficult.
The parties are unable to have precise indication of their
respective commitments (financial)
(ii)“Ad Hoc” Schedule
This is a schedule specially prepared for a particular project
and lists only those items which are appropriate to that
project, including any special or unusual items.
An ‘ad hoc’ schedule may be pre-priced by the surveyor (in
which case the form of the tender will be the same as when
using a standard schedule) or the rate column may be left
blank by the surveyor for the tender to insert individual
rates against each item.
The method because of the absence of quantities , makes the
comparison and assessment of tenders much more
difficult.
• Advantages
• Tenderers are only required to concern
themselves with a restricted range of items, thus
enabling them to assess rates or percentages
more accurately
• Tenderers are able to obtain a clearer picture of
the scope of the wok from the items listed in the
schedule
• Disadvantages
• These are similar to those applying to standard
schedules
(iii) Bills of quantities from previous contract
• the bills of quantities used will normally be of
comparable type of building of similar
constructional form to the proposed project.
• It is, in effect, a pre-priced ‘ad hoc’ schedule
and will be used in the same way.
• Advantages
• The time required to prepare tender documents is
reduced to the minimum
• Tenderers have to consider a restricted range of items
• Disadvantages
• The parties are unable to have a precise indication of
their respective commitments
• There may be a considerable discrepancy between the
successful tender and the real cost of the work, owing
to the approximate nature of the quantities
 Cost Re-imbursements (Cost Plus)

• The contractor undertakes to carry out an

indeterminate/unknown amount of work on the
basis that they are paid the prime or actual cost
of labour, plant, and materials. In addition, the
contractor receives an agreed fee to cover
management, overheads and profit.
• Of all the types of contract, this produces the
most uncertainty as to the financial outcome; it
should be used only in circumstances where none
of the other types is appropriate.
• Cost-plus contracts are best used for
uncomplicated, repetitive projects such as road
contracts.
• There is no tender sum or estimate, and
• The greater the cost of the project, the greater
the contractor’s profit.
• Of all the types of contract, this produces the
most uncertainty as to the financial outcome; it
should be used only in circumstances where none
of the other types is appropriate.
• Prime cost contracts have an attraction that
work on site can commence in the early stages
of design and this may be all important to the
client than cost.
• It should be noted that no site measuring is
necessary other than checks on the quantities
of materials for which the contractor submits
invoices.
• The process of checking calculating and verifying
the total prime cost involves a vast amount of
investigation and checking invoices , time sheets,
subcontractors accounts etc which can be both
tedious and time consuming therefore there must
be a proper system of recording, verifying and
valuing the prime cost which must be
implemented.
• It is vitally important that to define clearly what is
intended to be included as prime cost and what is
intended to be covered by the fee.
• Advantages
• The time required for preparation of tender
documents and for obtaining tenders is
minimized, thus enabling an early start on site
to be made.
• work on site may proceed before the detailed
design is complete
• Disadvantages
• The parties have the least precise indication of
their respective commitments.
• The cost of construction to the client is likely
to be greater than if other types of contract
were to be used.
• The computation and verification of the total
prime cost is long and tedious
• 1. Cost plus percentage fee
• The contractor is paid a fee equal to an agreed
percentage of the total costs of labour, materials
and plant used in carrying out the work.
• The outstanding disadvantage to the client is that
the more inefficient the contractor operations are
and the greater the waste of resources, the
higher the fee paid to the contractor it will be.
• Total prime cost 50 000.00
• 15% addition for overheads7 500.00
• 5% addition for profit 2 500.00
• 10 000.00
• Total cost of contract 60 000.00
• If however due to uneconomic organization of
the contract , inefficiency and excessive waste,
the total prime cost was 55 000.00 for the same
job, then the total cost would be
• Total prime cost 55 000.00
• 20% addition for overheads and profit 11 000.00
• Total cost of contract 66 000.00
•
• As the contractor’s overheads chargeable to
this job would still be 7 500.00, it follows that
the real profit would be 3 500.00. the
disincentive to the contractor to work
efficiently is thus seen to be strong.
• 2. Cost plus fixed fee
• The fee paid to the contractor is a fixed sum
which normally does not vary with the total
prime cost, but is based on an estimate of the
likely total. It can only vary if either the scope
of the work or the conditions of carrying it out
were materially altered after the contractor
tendered. The fee if considered in percentage
terms is lower when the prime cost is higher.
• Using the same illustration as before , but with
the contractor having tendered a fixed fee of
10 000.00(7 500.00 overheads and 2 500.00
profit) the sum paid to the contractor as fee
would be equivalent to 20% if the total prime
cost was 50 000.00. if as before the prime cost
was higher for the same reasons the financial
picture would be
• Total prime cost 55 000.00
• 15% addition for overheads 7 500.00
• 5% addition for profit 2 500.00
10 000.00
• Total cost of contract 65 000.00
• The fee is now equal to 18.18% (10000/55000) of
the prime cost and the profit portion only 4.55%
(2500/55000). if the prime cost rose to 60 000.00
the fee would equal 16.67% (10000/60000)and
the profit 4.17% (2500/60000)
• 3. Target Cost
• This variant has an incentive of reducing the total
prime cost by providing for a bonus to be paid to
the contractor if the total cost is less than an
agreed sum(the target) and also a penalty to be
paid if the total cost exceeds that sum.
• The bonus and the penalty are commonly 50% of
the difference between the total amounts, but
may be agreed percentages.
• The target is an estimate of the likely total cost.
• Assume the likely total cost of 60 000.00 and at the end of
the job (assuming the higher cost shown above) the final
payment would be calculated as-
• Total Prime cost 55000
• Fixed Fee 10000
65000
• Deduct Penalty, being 50% (50% of 5000)
• Excess of over $60000 2500
• Amount of final payment 62500
• In effect the fee has been reduced to 7 500.00 which is only
just enough to meet overheads, leaving nothing for profit. It
follows therefore that the contractor will need to be very
satisfied that the agreed sum is realistic estimate of likely
cost and the PQS must give him very reasonable opportunity
and assistance to satisfy himself in that regard.
• However , if the contractor were able to reduce the prime
cost say to 48 000.00 final payment would be calculated as
•
• Total prime cost 48 000.00
• Fixed Fee 10 000.00
• 58 000.00
• Add bonus being 50% of saving over 60 000.00 1 000.00
• Total cost of contract 59 000.00
•
• The fee has now increased to 11000.00 including 3500.00
profit, the overheads remaining at 7500.00
Circumstances in which the various types
of contract may be used
• Bills based on Firm Quantities
• When there is time to prepare a sufficiently
complete to design to enable accurate
quantities to be measured
• When the client’s total commitment has to be
known beforehand.
• Based on Bills of Approximate Quantities
• When the design is fairly well advanced but
there is insufficient time to take off accurate
quantities or the design will not be sufficiently
complete soon enough for that to be done
• When it is desired to have advantages of
detailed Bills of Quantities.
 .
• Based on drawings and Specification
• When the project is fairly small
• When time is short and the client considers it
to be less important to have the benefits of
Bills of Quantities than the early completion of
construction work.
• Based on Schedule of rates
• When the details of the design have not yet been
worked out or there is considerable uncertainty with
regards to them.
• When time is pressing
• When term contracts are envisaged, theses are
appropriate where a range of repetitive work is
required to be carried out such as external
redecoration of an estate of houses. The contractor
tenders on the basis of unit rates which are to remain
current for the stated term usually one year or the
estimated period which the proposed work will take.
• Based on prime cost plus fee
• When time is short and cost is not as important as time
• When the client wishes to use a contractor who has
worked satisfactorily for him and by whom he can
trust to operate efficiently while being prepared to pay
higher cost entailed in return for the advantages
• In cases of emergency such as repairs to dangerous
structures
• For maintenance structures
• For alterations jobs where there is insufficient time or
it is impracticable to produce the necessary
documentation
Allocation of Risk
• The contractor bears a high degree of risk where the
contract is based on drawings and specification firstly
because it is a lump sum contract, he must estimate his
expected costs as accurately as possible because any
adverse mistake will reduce his profit.
• Secondly there being no bills of quantities provided the
contractor must take off his own quantities from the
drawings to formulate his tender and again any error in the
process will affect his profit.
• The employer’s risk in this situation is small. He knows that
at the outset what his financially liability will be and is
under no contractual obligation to reimburse the
contractor for any errors which he may have made in
preparing his tender.
• Where a cost reimbursement contract is used the
contractor’s risk is reduced considerably because
he is paid his full costs and a fee addition.
• His only risk is in pitching at the right level the fee
which he tenders.
• The employer bears the risk of the prime cost
becoming much higher than estimated, owing
perhaps to an efficient site agent or to wastage of
resources.
• Other types of contract fall within these
extremes.