Selection of Procurement Strategy
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Published: Fri, 09 Feb 2018
A major determinant of project success is the selection of the most appropriate procurement strategy which will be used as a frame work to acquire the services of professionals in the industry (Morledge at al, 2006). This report presents the stages that have to be gone through in other to select the best procurement strategy for Janus Leisure plc.
Before a suitable project strategy can be selected, there are many variables that need to be considered. However, Masterman (2002) explains that with regards to procurement, only those sub strategies which will have an impact on the ultimate procurement strategy should be considered. He therefore describes the process as consisting of: understanding the client, assessing client objectives, identifying the project constraints including risks and the method of organising the design and construction. These points will therefore form the framework of this report.
Clients in the construction industry are becoming complex in their requirements which has subsequently led to increased client dissatisfaction levels (Latham, 1994). It is therefore essential to identify the type of clients being dealt with as this will have an influence in the choice of procurement method. Based on the categorization of clients by Masterman (2002), Janus leisure plc can be described as a private organisation who generates its funds from its internally business activities and therefore are concerned with profit maximisation wherever possible. Furthermore, we can also say that, the client is an inexperienced client in terms of construction as their main business focus is horse racing. It does not involve in construction activities often and only owns 6 racecourses. However, it is assumed that, the client is very aware of what infrastructure of its business should look like. Finally, we can also say that Janus leisure is a secondary client who requires the building to enable it them house their business activities. This therefore means that construction represents only a small percentage of their annual turn over.
1.2 PROJECT SCOPE
The company intends to improve its flagship racecourse at Melchester which hosts the 5000 guineas stakes every year. The proposals are to be undertaken in two phases:
demolition of the existing grandstand
the construction of a new 5-storey grandstand to include an extensive conference and exhibition centre (10,000m2 total) and associated external works (budget £25M)
refurbishment of two existing stands circa 100 years old (budget £5M)
construction of a new 120-bed hotel facility and casino (budget £12M) to be operational for the 2013 5000 Guineas Stakes meeting in mid-September
1.3 CLIENT OBJECTIVES
Janus leisure plc has to consider a number of factors in other to choose the best procurement strategy for the project. To provide guidance for client on their decision of the most appropriate procurement strategy to adopt, Turner (1997) proposed a list of seven factors to consider.
- Completion time
- price certainty
- price competition
- management and accountability
These will be discussed in detail in the next sub section.
The objectives and requirements of the client in this report have been categorised under cost, quality and time expectations of the client. They also represent the criteria used by the client in the assessment of the procurement strategies. The following criteria as adopted from Turner (1997) has been established and discussed.
Relevance of cost certainty
Janus leisure plc is a company which aims at maximising profit wherever possible. It will therefore not intend to spend more than it has budgeted for each section of the development. This implies that, high on the priority of the client is to have a fair idea of how much the project will cost prior to the start of the actual construction. Since the company desires to constantly invest in all of its venues over the coming years. It will therefore be preferable that any strategy chosen should be able to give an idea of the total commitment to be expected, since the project is phased, it means that, this will be a tougher consideration for the first phase but will be achieved to higher degree of accuracy I the second phase
Relevance of price competition
Janus leisure has a total budget of £42M for the entire project. With this commitment in mind and a fair certainty of the cost, the client does not really place so much focus on the competition for phase 1. Though Turner (1997) explains that best market price can only be obtained through competition, the client is of the view that factors such as time requirement are of more concern to him and any bid which was around his budget was alright for the first phase. With regard to the second phase, since there will be more time., it is the intention of the client to use competition in other to attain the best price as such therefore any opportunities for price competition will be preferred more.
Organisation and accountability
It is assumed that the client is fully aware of the fact that, risks go with premiums. However, Janus leisure plc prefers a single point responsibility for the construction of the hotel and will be prepared to pay a premium for that. Clamp et al (2007) argues that leaving both design and construction within one entity could have compromising effects on the quality; however, Janus leisure will prefer to have to deal with just one company in other to eliminate the hassle of lengthy negotiations with many professionals. The client requires that it retains the control for the management of the first phase because it is of more importance to him as he needs it to be ready by 2012.
This is a very high priority for the client because they intend to return the 2012 5000 guineas stakes to Melchester. This clearly states that phase 1 should be competed and ready for commissioning before that time. It is known that the duration of the fist phase is short as such early start in needs to ensure early completion. Similarly, with the second phase, it must be completed be 2013. Though this seem to be a longer, advantage should be taken to obtain more competitive while maintaining acceptable standards of quality. Therefore, time is of a higher priority in phase 1 than in phase two
The proposed developments are in two phases and should be carried out as such, the duration of the first phase is 2 years which should be ready by mid-September 2012 while that of the second phase is three years and should be completed and ready to use by mid September 2013. As a private client, completion time is of a high priority.
Janus leisure plc has been describes as an in experienced client, as such there is the possibility for the client to want to change his mind as the project progresses. Furthermore, the extent of the refurbishment in the first phase cannot be fully envisaged. This implies that, there is an increased possibility of significant variations. However, variations will be minimal in the second phase because, Janus has built some hotels in the past and therefore know what exactly they will want to have in this hotel. It is important to consider variations because they entail high costs and have effects on the construction period and also each procurement method deals differently with variations.
Level of prestige
Horse racing is a sport that is patronised by a large cross-section of the public as well as wealthy and rich; however, the proposals by Janus leisure does not call for a prestigious design though the requirements of the conferencing, banqueting as well as the hotel should be good and incorporate state-of-the-art technology.
In terms of complexity during procurement, functionality of the project is not an essential requirement however; complexity of the construction itself and the environmental services is usually very significant (Turner, 1997). The requirements of the project are fairly straightforward as the major requirements were air conditioning and public address systems therefore; complexity is not a great problem in the first phase. With the second phase, more facilities like escalators, lifts and air conditioning facilities will be provided but that notwithstanding, we can say that both faces require a good quality.
It is important that any risks to the project are to be effectively managed by the party that is best able to handle them. And every procurement system distributes the risks between the client and contractor (Masterman 2002). Some procurement methods allocate more of the risks to the client and others more to the contractor. Since the client want to control of the first phase, they accept to have the risk even though they will prefer to share them wherever possible. Because the client is quite inexperienced in construction, will prefer to leave to as much of the speculative risk as possible with a single contracting entity though they are aware this might mean payment of premiums for the second phase because it will need time to organize its business activities.
2.0 PROCUREMENT SYSTEMS
With respect to the client requirement, four procurement methods have been selected to be appraised because of the peculiar characteristics they have which may be of interest and suitability to the project. They are
- Traditional method
- Design and build
- Management contracting
- Construction management
2.1 TRADITIONAL METHOD
This method is referred to by some authors and researchers as the separated system and it is the oldest form of procurement (Masterman, 2002). It is characterised by the separation between the design and the construction phases and therefore offers multiple points of responsibility (Oyegoke et al ,2009). The client first appoints consultants who will be responsible for the design, cost control and contract administration. Once the design in complete, the client and his team invites tenders from suitable contractors and eventually appoints one of them who will be responsible for carrying out the works. There is therefore direct contractual relationship between the client and the consultants and also between the client and the contractor. The contractor is responsible for all the workmanship and materials including work by sub-contractors and suppliers (Clamp et al, 2007). In some cases, the client could novate subcontractors or suppliers with whom the main contractor will have legal contracts. The figure below shows the contractual relations of this system.
Fig 1: Contractual relationship; The Traditional Procurement Method (Morledge et al 2006)
Use of Traditional method of procurement
According to Murdoch and Hughes (2008), following the criteria developed by the Joint Contracts Tribunal (JCT 1988), the following are a proposed a list of instances which traditional method is most suitable.
The employer has caused the design to be prepared and for the purposes of the building contract takes responsibility for it.
The employer’s designer is sufficiently experienced to co-ordinate and lead the design team and to manage the interface between design and production.
The design is substantially complete when the contractor is selected.
An independent quantity surveyor will be used to plan and control the financial aspects of the project
The contractor is selected on the basis of the contractor’s estimate and carries the risk that the estimate may be wrong.
The employer reserves the right to select sub-contractors for certain parts of the work.
‘Prime cost sums’ including employer-selected sub-contracts, do not form the major proportion of the contract sum.
The employer’s agents feel that it is important to use an acceptable negotiated form to ensure a fair and familiar distribution of risk.
The employer makes no explicit choice and the advisors do not raise the issue.
With regard to the requirement of the client, the traditional method will be very suitable with regard to price certainty which is high on the priority of the client for the first phase. This is because designs will be completely finished and bills of quantities produced which will be priced by tendering contractors. As such, Janus will know its financial commitment to a high degree of accuracy before the start of the project. However, the problem will be whether there is enough time for full designs to be produced followed by tendering before actual construction starts. This is a concern because completion time is equally of high priority to the client and so the traditional method might not be so suitable in that regard. The traditional methods is also one of the best ways to secure best market price as there is competition between tendering firms, however, since competition is not high on the priority of Janus leisure plc for the fist phase, the second phase will take advantage of that. Since variation is to be expected in the project during the first phase, the traditional method will allow, Janus leisure, a flexibility of mind until when the tender documents are prepared for bidding. After this, changes in specification might be very costly and time wasting. It will be suitable for the second phase as well because variation is expected to be even lower. Janus leisure will not be favoured in terms of his accountability requirements for the second phase because Oyegoke et al (2009) explains that this system introduces multiple points of responsibility.
2.2 DESIGN AND BUILD
This system is characterised by the integration of the design and construction phases. Masterman (2002) explains that, the commonly used integrated system is the design and build method however there are other variants such as novated design and build, develop and construct, package deal and turn key projects. Within this report, only the design and build variant is considered.
The approach leaves full responsibility of the design and construction with a single organisation: the contractor. Rashid et al (2006) explains that, the selection of the most suitable contractor is based on the brief and the specification given by the client at the time of bidding. In effect, the contractor has the total responsibility for all the works, co-ordination and integration of the whole process as well as appointment of any consultants, specialists or subcontractors (Murdoch and Hughes, 2008). Figure 2.2 shows the contractual relation with this system.
Fig 2 Contractual relationship: The Design and Build system (Morledge et al 2006)
Use of the design and build method
According to Murdoch and Hughes (2008), there are some characteristics of a project which determine whether the design and build method will be suitable for a particular project, theses are listed below:
The client’s familiarity with construction(experience)
The relative importance of client priorities (time, cost, function, quality, value for money etc.)
The technical complexity of the project
The need to make variations to requirements as work proceeds
The patterns of responsibility and communication
The need for an early start on site.
With regard to the requirements of Janus leisure plc, this method will be suitable in regard to project completion time because of the integration of the construction and design phases will make the project faster, furthermore, since there is a lump sum fixed price for the bespoke design and construction (Masterman, 2002) the client will equally have high degree of price certainty prior to the start of the project. This method will be suitable because for the client in the second phase in terms of his risk allocation requirement as most to the risk will tend to be with the contractor however, it may not be suitable for the first because the client wants to retain more control. Also, design and build will be suitable for the client because the client will only have one contractual relation with the contractor which will march his responsibility criteria. However many researchers including Masterman (2002) and Turner (1997) have argued that since both design and construction are left with the contracting firm, there could be possible compromises in the quality expectation in terms of both design and more importantly workmanship and materials, I will also argue that since the client will give a comprehensive brief with little variation for the second phase, this should not be a big problem. It is again worthy to note that the system will not particularly be suited to the variation requirement of Janus leisure plc for the first phase. The criteria established the possibilities of variations as the project progresses, especially in the first phase but the design and build system freezes excessive variation at an early stage when the contract is signed and any changes after that will tend to cost the client lots of money and time. Fortunately, Janus is already aware of this. Again, leaving both the design and construction on the contractor means leaving more risks with him and this will involve payment of premiums as such.
2.3 MANAGEMENT CONTRACTING
This is a method of procurement in which the management contractor is paid a fee by the client to manage the whole building process and therefore has direct contractual relations with all the works contractors (Morledge at al, 2006). The management contractor advices on the buildability of the designs as well as value management during the design. The construction works are let out in packages therefore there is early start with this method. The management contractor does not take part in the actual construction but provide preliminaries for the project. The figure below shows the contractual relation with the management contracting form of procurement.
Fig 3.Contractual relationship: Management contracting (Morledge et al 2006)
Use of Management contracting
Murdoch and Hughes propose a list developed by the Joint Contract Tribunal (JCT, 1987a) which indicates suitable circumstances in which to use Management contracting. The list is as follows:
The employer wishes the design to be carried out by an independent architect and design team
There is a need for early completion
The project is fairly large
The project requirements are complex
The project entails, or might entail, changing the employer’s requirements during the building period
The employer requiring early completion wants the maximum possible competition in respect of the price for the building works.
This system of procurement is desirable in respect of the client priorities of completion time because of the overlap between design and construction, furthermore, as the work will be let out in packages, competition, though not of a high priority to the client, can be used to attain best price. Under this procurement method, the client will also be able to have a fair certainty of the price before the start of the project. The system will also be suitable in terms of the variation requirements of the client for the first phase because the full design is co-ordinated and developed by the client and his team, as such there is much room for flexibility until that package has been let out on contract. With this procurement system, much of the speculative risk is with the client while works contractors take just a little (Clamp et al, 2007) as such this will be acceptable for the first phase but not quite meet the expectation of Janus leisure for the second phase as they prefer to leave much of the speculative risks with the contracting firm.
2.4 CONSTRUCTION MANAGEMENT
With this procurement system, the client appoints the construction manager on the basis of a fee to manage, prepare and co-ordinate the design and construction as well as advising the design team on the buildability of the design (Morledge et al, 2006) as such the client does not allocate risk and responsibility to a single firm because the works are subsequently let out to packages contractors who are in direct contractual relation with the client. The contractual relation with this procurement type is shown below.
Fig 4 Contractual relationship: Construction management (Morledge et al 2006)
Use of Construction management
According to Murdoch and Hughes (2000) Construction management is suitable when the characteristics of the project fulfils in part or whole of the following:
The employer is familiar with construction, and knows some or all of the professional team.
The risks associated with the project are dominated by timeliness and cost (e.g. the employer may be a private sector employer requiring a commercial building).
The project is technologically complex involving diverse technologies and sub-systems.
The employer wants to make minor variations to requirements, as the project proceeds.
There is scope for separating responsibility for design from responsibility for management of the project.
The employer requires an early start on site.
The price needs to be competitive, but ‘value for money’ is more important than simply securing the least possible cost.
This procurement method similar characteristics with the management contract variant, however, there are some differences. The completion time requirements, variation requirement and quality requirements is the same as in the management contracting. However, this system leaves virtually on all the risk on the contractor: a trait which will not suit the requirement of Janus leisure plc. Furthermore, the is no certainty of price as the system works with target sum but advantage can be taken of price competition as the packages are let out to package contractors. Another point worthy on mentioning is that, this method will not particularly suit the responsibility requirement of Janus leisure, who prefer to have to deal with just one contractor.
2.5 RISK SHARING
This determines the apportionment of the risks that occur to the party that is able to handle it more adequately than the other. Some procurement methods allocate more of the risks to the client and others more to the contractor, Janus leisure plc is willing to accept some of the risk provided they will be able to foresee it before it occurs for the first phase but will prefer to leave much risk on the contracting firm fro the second phase. The different procurement methods have limits to which the client can tranfer risk. A speculative risk chart according to the different procurement methods can be seen below
table 1 : Speculative risk (Clamp et al., 2007)
3.0 SELECTION PROCESS
The aim of the selection process is to accurately identify the best procurement route which meets and satisfies the client requirements best (Masterman, 2002). The tables below shows the results of the assessment criteria for the two phases of the project
Table 2 priority checklist for phase 1
Table 3priority checklist for phase 2
3.2 PROCUREMENT SYSTEMS FOR PHASE 1
Based on the rating on table 2 and the client’s success criteria, the management contracting procurement system has been recommended to be used in the execution of phase 1
Reasons for recommendation
It has been established already that time is crucial to the first phase of the developments, as such, this procurement system is suitable because it allows construction to start early once a work section has been completely designed, for example, immediately the foundation are fully designed, the client and his team can give that part out on contract as the designed is continued.
The client still retains full control of responsibility of the design as the construction goes on, so since Janus indicates the possibility of variations this will be very much accommodated while the management contractor contributes to the buildability of the designs.
The client and his team will also have the chance to select materials and techniques in other to achieve the standard it requires which still reduces maintenance costs.
3.3 PROCUREMENT SYSTEMS FOR PHASE 2
Based on the critical analysis of the critical factors of success for the project as well as the adoption of the table 3 above, the competitive design and build system of procurement has been chosen for the construction of phase 2.
Reasons for recommendation
The client rates time as important as such, since the contractor is in charge of both the design and construction, there will be an early start of the project on site which will guarantee completion to schedule. However, since the responsibility of the design will be that of the contractor, the client will have to provide a good brief to the contractor in other to eliminate any confusion. This will be required to a great extent so that variations will be reduced to the barest minimum.
The design and build procurement method is also best for the phase because the entire of design and construction has been shifted to the client and this suit Janus as a client thought the implication is the likelihood for an increased cost. The client is satisfied with this option because he will have enough time for his own business activities
Also, since Janus does not require direct professional accountability for the design and consultants for the second phase, this system proves to be very suitable because the design and build system leaves the entire accountability between the contractor and his team and Janus only has a single contract with the main contractor
Janus requires a high degree of price certainty before the start of the construction and the design and build system offers this. Moreover since the requirements indicated that the project is not so complex in terms of technical advancement, the system will be adequate and certain to deliver a product of good quality and workmanship.
Finally, the adoption of the competitive variant of the design and build procurement system will give the client and his team the chance to select the best bid from the contractors as a result of the tenders that will be submitted based on the client brief.
3.3 ORGANIZATIONS TO BE COMMISSIONED
The consultants to be commissioned for the first phase are as follows:
Management Contractor: Engaged very early in the project to provide expert knowledge to other consultants on the constructability of the designs.
Architect: Prepares all the necessary architectural designs in accordance with the client’s brief and with the management contractor
Quantity Surveyor: Carry out feasibility studies, prepare cost estimates and cost plans in conjunction with the designs. Also carry out interim valuations for payment to works contractors, in conjunction with the management contractor.
Engineers: Prepare the structural, mechanical and electrical engineering drawings to be priced by the quantity surveyor and form part of the contract documents for executing the works.
For the second phase, the client needs to contract a design and build contractor who will be in charge of both design and construction of the facility
The proposals by Janus leisure plc have been thoroughly examined and discussed, going through the range of procurement methods and applying the table by CRT, it has been recommended that for a successful execution of the client’s developmental proposals, management contracting should be adopted for the first phase while design and build is adopted for the construction of the hotel in the second phase. However, it must be stated that, the success of the project does not only depend on the procurement method used but also on the efficiency of the consultants and the contractors used. Therefore the client should be methodical in the approach for selecting the professionals for the execution of the work.
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