Unit 4: Non-traditional Procurement Routes D39PZ: Procurement and - - PowerPoint PPT Presentation

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Unit 4: Non-traditional Procurement Routes

D39PZ: Procurement and Contracts

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Selecting the right procurement route

Types of procurement routes

• [Traditional]
• Design and build
• Management contracting
• Construction management
• The Private Finance Initiative
• Partnering

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The “design and build” route

Main features:

• Tender documents usually comprise a brief developed

to outline scheme stage, stating:

• Required building function
• Areas / spaces required
• Building services performance criteria
• Outline specification of key elements (e.g. finishes)
• A single Contractor is appointed to complete the design

and construct the project

• The Contractor will employ its own design consultants

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The “design and build” route

Main features:

• Suitability
• Suited to all clients, including inexperienced
• Suited to clients requiring cost and time certainty
• Not suitable for complex or high quality buildings
• Design and build reduces variations
• Design responsibility lies with the Contractor
• Reduced change brings cost and time savings

(compared with traditional procurement)

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The “design and build” route

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The “design and build” route

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The “design and build” route

Advantages:

• Client interacts with a single point of responsibility
• Inherent buildability
• A firm price can be agreed prior to construction
• Shorter overall duration (compared to traditional)
• Contractor’s design liability can be extended to include

fitness for purpose

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The “design and build” route

Disadvantages:

• Client needs to appoint Contractor before design is

complete

• No design overview unless Consultants are appointed

by Client

• Difficult for clients to prepare an adequate brief
• Contractors’ bids are difficult to compare
• Design liability limited by use of standard contracts
• Client changes can be expensive

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The “design and build” route

Risks:

• Low cost risk as most design and build contracts let on

lump sum basis

• Low time risk as the Contractor will use set time goals

and be held to them

• High design / quality risk as Contractor develops the
• design. Develop and construct procurement route can

be used to overcome this

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The “design and build” route

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The “design and build” route

• The two-stage design and build variant:
• Competitive Design and Build
• Client prepares “client’s requirements” documents
• Several Contractors tender design proposals brought to

(typically) scheme design stage

• Winning contractor appointed on basis of design content

(including predicted cost)

• The appointed Contractor then completes and constructs

the design

• Novation of the initial design team is required

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The “design and build” route

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Types of procurement route

[Traditional] Design and build

Management contracting

Construction management The Private Finance Initiative Partnering

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The “management contracting” route

Main features:

• Management Contractor advises Client on programming,

divisioin of the project into work packages and buildability and

• btain tenders
• Work divided into series of packages
• Each package is awarded on a lump sum, fixed price basis to

separate Works Contractors

• Construction of each package can start as soon as the Client

approves its design

• Design and construction overlap considerably
• Relies on clear communication and co-operation, and mutual

trust between Employer and Contractors

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The “management contracting” route

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The “management contracting” route

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The “management contracting” route

Advantages:

• Concurrent working is inherent
• Potential to reduce project duration
• Opportunities to improve buildability
• Breaks down traditional adversarial barriers
• Late changes easily accommodated
• Work packages tendered competitively

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The “management contracting” route

Disadvantages:

• Needs a good quality brief
• Poor price certainty
• Requires a good quality project team
• Difficult to resist Works Contractors’ claims

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The “management contracting” route

Risks:

• Medium cost risk as total cost is not known until last

package let

• Medium time risk as total duration is determined by

package selection

• Low quality/design risk due to close working of client,

designers and Works Contractors

• Client relies on estimated costs until the last package

has been tendered and let

• A Guaranteed Maximum Price (GMP) may be negotiated

with the Management Contractor to move cost risk from the client

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Types of procurement route

[Traditional] Design and build Management contracting

Construction management

The Private Finance Initiative Partnering

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The “construction management” route

Main features:

• A Construction Manager advises the client
• The Employer contracts directly with the numerous

Works Contractors

• Shorter communication lines give quicker responses

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The “construction management” route

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The “construction management” route

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The “construction management” route

Advantages:

• Potential to reduce project duration
• Individual packages let competitively
• Opportunities to improve buildability
• Breaks down traditional adversarial barriers
• Concurrent working is inherent
• Clarity of roles, risks and relationships for all
• rganisations
• Late changes easily accommodated

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The “construction management” route

Disadvantages:

• No cost certainty at outset
• Needs informed client, able to take an active role in the

project

• Clients may not appreciate their risk exposure
• Risks adopted by clients in return for control
• Needs a good quality brief
• Requires a competent project team
• Needs effective control of time and information

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The “construction management” route

Risks:

• Medium cost risk as total cost is not known until last

package let

• Medium time risk as no single organisation is solely

response for timed completion

• Low quality/design risk due to close working of client,

designers and Works Contractors

• Clients have historically had problems with Construction

Management as they have not appreciated the risks associated with control

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The “management” routes (MC or CM)

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Typical risk distributions

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Types of procurement route

[Traditional] Design and build Management contracting Construction management

The Private Finance Initiative

Partnering

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The Private Finance Initiative (PFI)

Key features of PFI schemes:

• A public sector client procures a service from the private

sector

• Several private sector organisations collaborate to provide

the service

• New buildings or infrastructure is usually required
• The quality of service is specified; the quality of capital

assets is not (other than functionality)

• Capital assets are financed, designed, constructed, and
• perated by the private sector

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The Private Finance Initiative

Key features of PFI schemes:

• Capital assets may be retained by the private sector at

the end of the agreement

• PFI schemes run for long time periods
• The private sector is exposed to many risks:
• Financing risks
• Demand risks (continuity and certainty)
• Technological risk
• and so on
• PFI schemes convert public sector capital expenditure

into revenue expenditure

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The Private Finance Initiative

Advantages of PFI procurement:

• Conversion of public sector expenditure from capital to

revenue

• Promotes the innovation and risk management

competencies of the private sector

• Ensures capital assets are maintained to a known level
• f performance throughout the agreement
• Flexibility in public sector servicing of the debt to the

private sector

e.g. shadow tolls on road schemes

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Typical cost and time overruns on large public sector infrastructure projects using non-PFI procurement

Initial cost estimate Final cost Delay Jubilee line extension £2.1bn £3.5bn 2 years Guy’s hospital £36m £160m 3 years

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Typical PFI scheme performance gains

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PFI scheme participants

• PFI schemes are complex collaborations
• They generally involve three types of organisation:
• 1. The public sector client
• 2. The private sector provider of the required service
• 3. Funders and investors

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The Private Finance Initiative

The public sector client:

• instigates the project to advance its primary strategy
• is usually inexperienced in PFI procurement
• is advised by central government bodies
• procures the service from the private sector via a single

contractual link

• procures the service from a Special Purpose Vehicle (SPV)

created by the private sector

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PFI scheme participants

• The private sector service provider comprises several

private sector organisations that collaborate to provide the service via the Special Purpose Vehicle (SPV)

• The SPV is an legal entity created by the collaborating

private sector organisations that:

• procures design, construction and operating expertise from

the construction industry;

• secures finance from funders and investors; and
• distributes risks inherited from the client

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PFI scheme participants

• The funders and investors provide the capital required to

construct new infrastructure

• Funders provide the majority of finance as loans that are

repaid during scheme operation

• Investors provide further finance through part ownership of

the scheme. They are paid dividends in addition to repayment of stock investments

• Funders and investors influence the private sector service

provider to ensure they will earn the required return on their investments

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PFI scheme participants

• “The consortium” comprises all the collaborating private

sector organisations:

• Construction designers, constructors, operators;
• Funders and investors;
• The SPV

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Typical PFI scheme structure

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The unitary charge

• In return for access to the service the client makes regular

payments to the SPV

• This is the “unitary charge”
• The private sector uses the unitary charge to:
• finance the construction of new infrastructure
• finance the operation of that infrastructure to a performance

level agreed with the client

• earn a profit

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Types of procurement route

[Traditional] Design and build Management contracting Construction management The Private Finance Initiative

Partnering

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Partnering concepts

Collaborative approaches:

• Recognise that success is more likely if organisations

work together for the good of the project, rather than themselves

• Are implemented as:
• Short term project partnerships; or
• Long term strategic partnerships
• Reply on a neutral third party to help organisations

partner by facilitating the process of establishing common ground and shared attitudes

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Partnering defined

“Partnering is a set of strategic actions, which embody the mutual objectives of a number of firms achieved by co-

• perative decision making aimed at using feedback to

continuously improve their joint performance.”

JCT Constructing Excellence contract

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Partnering defined

• All partnerships must:
• develop mutual objectives
• Solving problems collaboratively and simply before they

escalate into disputes

• measure performance to characterise continuous improvement

(Measuring continuous improvement)

• In addition, they should:
• share common values and cultural norms among partners
• incentivise partners to continually improve
• provide value for money to the client

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Forming partnerships

• Forming a partnership requires a step-change from

traditional practice

• An independent facilitator will guide the process
• Usually through a series of workshops
• Linked to commercial development if strategic partnering
• Linked to project process if project partnering
• Facilitator aims to build common understanding, practices

and goals among partners

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Value for money and partnering

• A criticism of partnering is the difficulty of ensuring value

for money

• Achieving VfM from partnering requires:
• comparison of partnership performance against other

procurement routes (using additional metrics than cost alone)

• demonstrating continual improvements in performance

throughout partnership life

• reforming the partnership after periods of operation
• removing underperforming organisations

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Target costing

• If actual cost < target cost
• Contractor and client share the saving
• Target cost must be realistic and not inflated
• If actual cost > target cost
• Contractor and client share the additional cost
• If actual cost > GMP
• Contractor and client share the additional cost below GMP
• Contractor bears all additional cost above GMP

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Procurement methods most frequently used in construction projects

Adopted from National Construction Contracts and Law Survey - 2012

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Don’t forget to bring your own copy of JCT Standard Building Contract with Quantities 2011 for the next lecture and every week thereafter Remember to read the full Unit notes and Appendices, and complete your independent study

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A FEW ADDITIONAL SLIDES ON DESIGN & BUILD PROCUREMENT ROUTE

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The “design and build” route

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The “design and build” route

• The two-stage design and build variant:
• Competitive Design and Build
• Client prepares “client’s requirements” documents
• Several Contractors tender design proposals brought to

(typically) scheme design stage

• Winning contractor appointed on basis of design content

(including predicted cost)

• The appointed Contractor then completes and constructs

the design

• Novation of the initial design team is required

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Novation

• Nowadays, most design and build projects include

some initial design development by the Client’s consultants

• The contract between these designers and the client

is passes to the winning D&B Contractor

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