Construction
Procurement Methods
Assoc. Prof. Muhwezi Lawrence
Course Lecturer
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Introduction
• Procurement is the act of acquiring goods, services or
works from an external source, often via a tendering or
bid process.
• There are a number of ways in which a project can be
designed and constructed.
• The selection of a procurement method must take into
account characteristics and constraints that are specific
to the project.
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Factors that influence Procurement Strategy
Selection
Before selecting the procurement strategy for any project, it is
necessary to first identify the factors which will determine the most
suitable procurement strategy for the project. These factors
include:
❑Key project objectives (Time, Cost, Scope, Quality);
❑Constraints of the project;
❑Risks that may arise during the delivery of the project and how
those risks might best be dealt with;
❑Level of complexity of the project.
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Key Objectives
The key objectives of each project will be identified during the project
definition stage as a precursor to procurement strategy selection. The
objectives generally relate to:
• Scope (i.e. what is to be delivered) together with any required
provision for flexibility in this regard;
• Cost, including whole-of-life and transaction costs;
• Time, including an appropriate allowance for the contract period;
• Quality, including fitness for purpose considerations;
• Sustainability, including social, economic and environmental
aspects. 4
Key Objectives Cont’d
• Innovation, encouraged through the use of performance,
rather than prescriptive, specifications;
• Community or stakeholder needs and expectations;
• Contribution to the advancement of government priorities.
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Constraints
Constraints are aspects of the project that limit, restrict or otherwise impact
upon the project objectives in some manner. Constraints are typically unique
to each project and may include:
• Time constraints;
• Budget constraints;
• Physical constraints;
• Availability of resources, including labour resources;
• Skills, capability and capacity of the project participants to deliver the
planned project outcomes;
• Market or industrial conditions;
• Policy requirements.
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Constraints Cont’d
❖The objectives and constraints of each building project are
frequently interdependent, and will therefore need to be
considered concurrently.
❖This approach will highlight the objectives and constraints
that critically impact upon the planned delivery of the
project and facilitate the selection of the most suitable
procurement strategy.
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Constraints Cont’d
• In some cases, however, it will be clear that one objective or
constraint takes precedence over all others due to its critical
impact upon project outcomes (for example, a constraint to
complete a new school building before the commencement of a
new school year).
• This critical objective or constraint should then be used to
determine the most suitable procurement strategy for the
project.
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Risks
• The second factor that may influence selection of a
procurement strategy is the risk associated with the building
project;
• Risks are events, both known and unforeseen, that might occur
during the delivery of a building project and which will usually
adversely affect the project outcomes;
• The nature of the risks to the project, and their impact on
project outcomes if they occur, are often determined by the key
objectives and constraints of the project;
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• For example, if a project has a particularly tight timeframe for
completion, delays to the construction program will be a risk to
securing the timely completion of the project. Once the key
objectives and constraints of the project have been defined, the
risks can also be identified.
• Responsibility for managing or mitigating particular risks is
broadly determined by the procurement strategy adopted for the
project. (For example, where the procurement strategy is ‘design
and construct', the risk of design errors is, in general terms,
passed to the contractor.)
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• Therefore, departments should consider and determine the
most suitable method to deal with the identified risks prior to
selecting a procurement strategy for the particular project;
• As a guiding principle, responsibility for managing a particular risk
should be allocated to the party best able to deal with that risk;
• Inappropriate risk allocation is likely to result in project budget
overruns (as contractors can reasonably be expected to make
allowances in their tenders for the risks for which they are
responsible) and increase the likelihood of contractual disputes
and litigation.
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Level of Complexity
The level of complexity of a project must be considered when selecting an
appropriate procurement strategy. The complexity of a project is determined
by a combination of factors, including:
• the size of the project;
• the duration of the project;
• the scope of the project;
• the number of stakeholders involved;
• the level of technology to be incorporated in the project;
• the degree of innovation required by the client;
• market conditions.
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❖While contractually complex procurement strategies may
sometimes be required for complex projects, the additional
resources needed to administer a complex strategy are likely to
be wasted if a simple strategy can achieve the same outcomes;
❖The inappropriate selection of a complex procurement
strategy can also lead to unsatisfactory project outcomes in
terms of cost, as tenderers may make allowances in their
tenders for additional administration costs and the possibility of
contractual disputes which might otherwise not have arisen.
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Selecting Procurement Strategy
• Having defined the key objectives and constraints of a project,
identified the risks, broadly determined the preferred risk
allocation and identified the level of complexity of the project,
the procurement strategy can be selected.
• The procurement strategy best suited to the project will be the
one that best aligns with the key objectives and constraints of
the project, that deals most appropriately with the identified
risks, and that suits the level of complexity of the project.
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Types of Construction Delivery Methods
Construction delivery refers to the relationships between the
owner, the builder, and the designer. Project delivery methods used
in the construction industry include:
• Traditional Method;
• Design-Build Method;
• Turnkey Method;
• Public Private Partnerships
• Construction Management Method.
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Traditional Method
• This is the most widely used method in which the owner hires a design
professional to complete the design, and then he also hires a general
contractor for carrying out the construction;
• The design professional and the general contractor report separately to
the owner;
• The design professional may assist owner in selection of contractor and
in subsequent monitoring of work during construction;
• The design professional may engage consultants or specialists, and the
design is completed before the start of construction;
• The general contractor engages specialty subcontractors in
construction. 16
Advantages:
• Owner knows the total cost before the start of construction;
• Well established and documented procedures (especially in
government contracts);
• Owner deals with one general contractor;
• Less risk and good use of market competition.
Disadvantages:
• Contractor and his construction expertise have no input into design;
• Difficult to reduce time involved in the sequential process (design-
tendering-bidding-construction);
• Change orders and unforeseen problems difficult to sort out. 17
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Design-Build Method
• The owner contracts a single firm which is responsible for
both design and construction.
• The Contractor's firm may have the design section, or he may
enter into a joint venture with a design firm for one particular
project.
• The owner, designer, and the builder work as a team, the
design process gets the benefit of the builder's input right
from the start.
• This method is more often used in negotiated contracts, and
occasionally in competitively bid projects.
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Design-Build Method Cont’d
Advantages:
• Substantial contractor's input into design may result in savings for owner;
• Fast tracking possible (execution of activities simultaneously)
• Owner has less responsibility and less involvement;
• Easy to incorporate changes;
• Less adversary relationships;
Disadvantages:
• Quality may be compromised to save cost;
• Cost will be known only when designs are complete;
• The design-build firm undertakes a high risk, which may increase the cost to
owner. 20
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Turnkey Method
• This method is similar to design-build approach in that the owner
contracts with one firm to whom he presents his need, budget, and
time frame for completion of project. But, in turnkey method, the
contract may include all or some of the following additional features:
• Selection and acquisition of site, financing of project, leasing of
constructed facility, etc;
• The owner makes the payment on completion of the project (when the
firm turns over the key for taking possession of the completed facility);
• This method is widely used for franchise projects which utilize the same
typical design and construction features.
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Public Private Partnership (PPP)
A method of procurement under which the government(project
owner) selects a private sector partner to finance, design and
construct the project works, and assume responsibility for
operations over an agreed period for a fixed fee;
Government
PPP
Private Party
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PPPs
• Successfully delivering large and complex public
infrastructure projects requires a strong private sector
partner;
• Used extensively in procurement of govt-sponsored
construction projects (hospitals, schools, universities and
highways);
• Provides a basis for a contract btn a public sector
organization and a private party;
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ATTRIBUTES
In a PPP method, the government remains
actively involved throughout the projects
life cycle;
The private sector is responsible for the
more commercial function such as design,
construction, finance & operations;
The goal is to combine the best capabilities
of both partners for mutual benefits.
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Forms of PPPs
The terminology used to describe these arrangements will
vary depending on the service that is provided by the
consortium.
Most common ones:
• Build, Operate & Transfer (BOT)
• Design, Build & Operate (DBO)
• Build, Own, Operate & Transfer (BOOT)
• Design, Build, Finance & Operate (DBFO)
• Build, Own & Operate (BOO)
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Build-Operate-Transfer(BOT) Method
• In this method, the owner contracts with a firm which is
responsible for design, construction, financing, and also
temporary operation of the project;
• The project is returned to the owner at the end of the operation
period which can extend over a few years;
• This method is increasingly used for government projects
involving express routes and also in large projects in developing
countries financed by World Bank.
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Design-Build-Operate (DBO)
• In a Design-Build-Operate (DBO) Project, the public sector
(Gov’t) owns and finances the construction of new assets. The
private sector designs, builds and operates/maintains the
assets to meet certain agreed outputs.
• The documentation for a DBO is typically simpler than a BOT
or Concession as there are no financing documents and will
typically consist of a turnkey construction contract plus an
operating contract, or a section added to the turnkey contract
covering operations.
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Design-Build-Operate (DBO)
• The Operator is taking no or minimal financing risk on the
capital and will typically be paid a sum for the design-build of
the plant, payable in instalments on completion of construction
milestones, and then an operating fee for the operating period.
• The contractor is responsible for the design and the
construction as well as operations and so if parts need to be
replaced during the operations period prior to its assumed life
span the contractor is likely to be responsible for replacement.
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Build, Own, Operate & Transfer (BOOT)
• The Private Sector builds, owns, operates a facility for a
specified period as agreed in the contract and then transfers
to the Public.
• During the concession period, the private company owns
and operates the facility with the prime goal to recover the
costs of investment and maintenance while trying to
achieve higher margin on project.
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Advantages of BOOT projects
• Encourages private investment;
• Inject new foreign capital to the country;
• Transfer of technology and know-how;
• Completing project within time frame and planned budget;
• Providing additional financial source for other priority
projects;
• Releasing the burden on public budget for infrastructure
development.
DISADVANTAGES!!!!!
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Construction Management Method
• This method provides for a three-party team. The owner contracts
with a Construction Management(CM) firm for providing coordination,
integration and leadership;
• CM firm then appoints a design team with approval of employer;
• While monitoring time schedules and budget are the main
responsibilities, the CM firm's role may include: overall programming
and management, preparation of tender documents, analysis and
award of bids, selection of construction methods, planning and
scheduling, procurement of equipment, supervision of contractor's
work, quality and cost control, claims assessment, progress payments,
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etc.
Construction Management Method Cont’d
Advantages:
• Integrated approach to planning, design and construction;
• Fast-tracking possible;
• Cost control is ensured and cost reduction possible.
Disadvantages:
• High owner involvement;
• Need for skilled and experienced construction managers;
• Constructions Manager's fees may be high. 35
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Force Account
• Executing works by force account means undertaking works
using the resources of a public agency or the government
without competitive bidding or negotiated contracts.
• Often such a system is promoted if the Project Owners believe that
there is a comparative advantage in Cost, Time and Quality issues.
• Besides, when there is a lack of capacity from the private sector to
undertake very large and technologically new projects, public
companies do undertake such projects using Force account delivery
systems.
• No contractor is willing to undertake the works
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PART VI—METHODS OF PROCUREMENT AND
DISPOSAL(PPDA ACT, 2003)
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79. Choice of Procurement Method
(1) A procuring and disposing entity shall in respect of—
(a) the procurement of goods, works and non consulting services, use any of
the methods in sections 80, 81, 82, 83, 84, 85 and 86 and the conditions for
their use specified in the Fourth Schedule to this Act; and
(b) the procurement of consulting services, use section 88A and the
conditions for procuring consultancy services specified in the Fourth
Schedule to this Act.
(2) The choice of a procurement or disposal method shall first be approved
by the Contracts Committee.
(3) A procuring and disposing entity shall first obtain the consent of the
Authority before it uses any other method than the ones set out in this Part
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of the Act.
80. Open Domestic Bidding
(1) Except as provided for in this Act or regulations made under this
Act, a procuring and disposing entity shall use the open domestic
bidding method.
(2) Open domestic bidding is a procurement method which is open
to participation on equal terms by all providers through
advertisement of the procurement opportunity.
(3) Open domestic bidding shall be used to obtain maximum
possible competition and value for money.
(4) Nothing shall prevent a foreign or international bidder from
participating in open domestic bidding.
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81. Open International Bidding
(1) Open international bidding is the procurement method
which is open to participation on equal terms by all
providers, through advertisement of the procurement
opportunity and which specifically seeks to attract foreign
service providers.
(2) Open international bidding is used to obtain the
maximum possible competition and value for money,
where national providers may not necessarily make this
achievable.
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82. Restricted Domestic Bidding
(1) Restricted domestic bidding is the procurement method
where bids are obtained by direct invitation without open
advertisement.
(2) Restricted domestic bidding is used to obtain competition
and value for money to the extent possible, where the value
or circumstances do not justify or permit the open bidding
procedure.
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83. Restricted International Bidding
(1) Restricted international bidding is the procurement
procedure where bids are obtained by direct invitation
without open advertisement and the invited bidders
include foreign providers.
(2) Restricted international bidding shall be used to obtain
competition and value for money to the extent possible
where the value or circumstances do not justify or permit
an open bidding method and the short listed bidders
include foreign providers.
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84. Quotation Method
(1) The quotation method is a simplified procurement
method which compares price quotations obtained from a
number of providers.
(2) The quotation method shall be used to obtain
competition and value for money to the extent possible,
where the value or circumstances do not justify or permit
open or restricted bidding procedures.
(3) The quotation method shall be used in works and
supplies.
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85. Direct Procurement
(1) Direct procurement is a sole source procurement method
for procurement requirements where exceptional
circumstances prevent the use of competition.
(2) Direct procurement shall be used to achieve efficient and
timely procurement, where the circumstances do not permit a
competitive method.
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86. Micro Procurement
(1) Micro procurement is a procurement method which shall be used for
very low value procurement requirements.
(2) Micro procurement shall be used to achieve efficient and timely
procurement where the value does not justify a competitive procedure.
Further Reading.
FOURTH SCHEDULE: CONDITIONS FOR USE OF PROCUREMENT
METHODS.
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