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Construction projects have varying purposes for the parties that are involved but time and money are usually the highest driving factors towards success. Commercial management is a key factor to how a construction project is run and the outcome of that project is therefore dependent on this management. Commercial issues that are presented on a construction project could be influenced by a number of factors such as the procurement system that was used or the contract management. As identified by Lowe and Leiringer (2008, p.13-15) there are four categories of environment that will have an effect on a construction project and these are "external milieu, corporate milieu, projects milieu and project milieu".
When looking at the individual milieu, they all have separate characteristics that will play a part in the life of a construction project. For example, the external milieu takes into consideration the procurement systems that have been used at the early stages of the project where the projects milieu pays more attention to how the uncertainty is managed as noted by Lowe and Leiringer (2008). It is these four categories of milieu that will cause commercial issues for the key stakeholders that are involved. This report looks to identify three commercial issues that the parties involved in the London 2012 Olympics project would have had to content with in accordance with three of the milieu mentioned above. The aim of the report is to analyse the commercial issues within procurement systems described within external milieu, management of uncertainty described within projects milieu and bidding described within project milieu.
Procurement in any construction project is of key importance both for the project itself but also on a smaller scale when procuring sub-contractors to carry out the works. The procurement systems that are adopted for a construction project are considered to be a characteristic of the external milieu which Lowe and Leiringer (2008 p.13-15) state "deals with the interfaces between the organisation and the environment within which it is active". With such a large project as the London 2012 Olympics there would always be an emphasis on the procurement, especially with the importance of completing on time for the actual games to start. Ward et al (1991, cited in Lowe and Leiringer 2008) notes that "client expectations of procurement methods are based on client experience with previous projects". This would be less of a problem for a project such as Heathrow Terminal 5 where previous terminals have been built, but for the London 2012 Olympics there is not a similar project within the UK which could be comparable, especially with the last Olympics being held in London in 1948, presenting a significant difference in construction methods for a start. Previous projects to be based on will naturally be previous Olympic Games, but with the constraints of the site and building methods, with design playing a large contribution especially in terms of aesthetics, there is a limit on how much previous experience can be relied upon. Because of the differences in previous Olympic projects and having no past experience in the UK to base knowledge upon, the client cannot relate procurement methods with previous experience as would be expected traditionally for other types of project.
Procurement systems within construction projects usually present commercial issues, especially in terms of getting subcontractors to tender for an area of the contract works, and certainly when these subcontractors are specialists in a particular area of works. Likewise, these problems that main contractors face with their subcontractors are reflected in the case of the client when seeking main contractors suitable for the project, and when delivery of such an important project is essential, the procurement is a process that needs to be thorough to ensure the right contractor is selected. Again, there is no previous experience to pull upon when looking at contractors in the UK who themselves have carried out similar projects, as there aren't any. However, thorough procurement can be costly in terms of finance and time, as supported by Quinn (2011), therefore presenting an issue for the commercial teams that are involved when looking to minimise the spending and adhering to the budgets.
In a report carried out by Quinn (2011) based on procurement through electronic tendering, it is clear that there were various procurement processes which were all done electronically, including an Olympic Delivery Authority (ODA) portal, databases to search the supply chain, automated analysis and more. Another technique that was adopted and noted by Quinn (2011, p1) was the "Pre-Qualification Questionnaire (PQQ) and Invitation to tender (ITT) templates" meaning that a standardised document could be sent out with the few modifications required to make the document suitable to that area of the project. By having these templates which could easily be modified to suit, meant that a large amount of time could be saved on the procurement, which consequently leads to monetary savings.
Management of Uncertainty
Management of uncertainty is one of the issues linked to projects milieu which Lowe and Leiringer (2008, p.14) note as dealing with the "interfaces between the corporate level milieu of an organisation and the individual projects in which it is active" which in this case is the London 2012 Olympic project. The management of uncertainty within construction projects tends to be a major commercial issue, with budgets and contingencies being set aside at the early stages of a project. The uncertainty will not just present commercial issues for the contractors involved but also the client, who will need to create a project contingency allowance for unexpected events.
The London 2012 Olympic project is a special case for the UK with the Olympic Games changing host nations every four years, and being so publicised the pressures of the project soon add up. Newman (2011) in his report on managing risks for the Olympic project mentions that there was a £7.2billion budget to be adhered to as well as the pressure on the Olympic Delivery Authority (ODA) to complete the venues a year in advance of the actual games taking place. Newman (2011, p.1) goes on to mention some of the risks that presented issues for the project including "a heavily contaminated site, worsening economic conditions, multiple stakeholders and the eyes of the world's press". In terms of finance, Jennings (2008, p.1) identifies that "the total cost of Athens 2004 escalated from £3.2b to £6.3b" which shows a huge increase in final project costs, something that the commercial teams of London 2012 tried to avoid. When looking into uncertainty and risk there will be commercial issues for all parties involved, especially on a project of this scale with varying factors such as contaminated land and economic conditions being worsened, this is a problem especially for the government and the client of the Olympic project.
Management of uncertainty and risk is therefore vital within any construction project to ensure that budgets are not over expended and that the project is completed within the programme dates, as delays would also present commercial issues to the parties involved with claims being made. In the report made by Newman (2011) it is clear that there were strategies put in place for the management of uncertainty and risk on this project, which is not unexpected. It is essential that the parties involved in the project know which risks are relevant to them, and Newman (2011, p1) looks at the risk hierarchy that was put in place which "enabled the management of risk at the right level, i.e., project teams could focus on project risks". By having such a hierarchy in place, there is reduced confusion in regard to the responsibility of the individual risks which therefore enables more focus on trying to mitigate the uncertainty. To support this risk hierarchy a risk register was also put in place where the responsibility of ownership and action was made clear and accessible.
With a strict budget for the ODA to adhere to and completion dates that could not be missed, commercial pressures were added to and the successful management of the risk and uncertainty was relied upon to reduce these pressures. Each risk on a construction project holds some form of commercial value and therefore creates a problem for the commercial teams involved. One of the methods used in the London 2012 Olympics risk management was, as Newman (2011, p2) notes, "Quantitative Risk Analysis (QRA)". This method proved to be useful in assisting with the commercial issue of contingency for the risk associated with the project as Newman (2011, p2) notes that the QRA results were used for "the contingency requirement of the Anticipated Final Cost". This is something that would hugely benefit the commercial teams involved in the project especially when looking at the £7.2billion budget that was set aside for the ODA. By using the QRA to assess the anticipated final cost of the project it gives all the parties involved an idea of how much money is being spent on the risk and how this amount can be mitigated and reduced.
Naturally as the amount of risks decrease throughout the project, the contingency will also decrease as distinguished in the report by Newman (2011). With the progression of the London 2012 Olympics and nearing the completion date, the amount of risks associated with the main construction works would have been accounted for and removed from the risk registers, allowing a focus on the final risks of the project more associated with completion and hand over. Newman (2001, p2) identifies that the QRA method was highly important when making forecasts for the overall cost and "savings of approximately £470million have been made through the release of risk". It is apparent that without the management and reporting techniques adopted during the London 2012 project the issues for the commercial team would not have been mitigated. Making contingency allowances and predicting the anticipated final cost is an issue that the commercial teams would have been presented with during the project, but through the risk management these problems could be dealt with.
Bidding is also an important aspect in construction projects and presents many commercial issues. The bidding for a project or contract works is considered to be a characteristic of the project milieu and Skitmore (1989) and Shash (1993, cited in Lowe and Leiringer 2008) state when bidding there are "two crucial decisions: whether or not to bid (tender) for a project, and second, the determination of the bid price", hence the commercial issues presented. When bidding for a project there is the consideration of how much that bid should be, which is determined by a number of factors such as the actual works and the amount of risk that is associated. However, there is also the consideration of future works by making a reputation on the current project. With a project such as the London 2012 Olympics, it is natural for many of the larger contractors to want to bid for the works to have their name on the face of a project so large and publicised. For these contractors and sub-contractors bidding for work, the success of the project could mean a whole new clientele would be opened up with further future works.
However, the bidding for the London 2012 Olympic project goes beyond the actual works carried out by the contractors and their subcontractors or specialists and extends to the actual bid for the games itself, with many other nations contending to host such a huge event. Again, this would create commercial issues for the governments of those nations bidding in terms of financing the actual games.
In summary, the London 2012 Olympic project was faced with many commercial issues that were represented in three of the four milieu. A further report would show that the three commercial issues discussed throughout this report only scratch the surface and there were many other issues within the project from all four of the milieu. It is clear that through the successful management of uncertainty and risk, the commercial issues of making contingency allowances and predicting final costs were reduced and made easier for the commercial team to deal with.