History Of Contracts And Procurement Construction Essay

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The procurement process is one of the central activities in organisation that significantly impacts its bottom line. A strategic approach to procurement activities is crucial in project execution and its success thereof, as it enables cost effectiveness resulting in value for money, through various frameworks that ensure an effectual and proficient network of suppliers is maintained. With regards to construction, due to the various key stakeholders involved and methodologies incorporated, there is a need for a strategic approach to procurement to ensure that the client's needs are realized and the success of the construction project's procurement. This report with reference to the construction of the proposed new auditorium by Heriot Watt University Dubai Campus, seeks to propose to the Head of Campus, a suitable procurement method utilizing a strategic approach to procurement whilst critically analyzing procurement alternatives for the construction of the proposed project. This report will further evaluate the suitable procurement practices for the project and further discuss the factors influencing the proposed critical procurement strategy and how it can be implemented. It will lastly discuss the benefits of adopting and integrating these alternative procurement strategies using relevant examples and thereafter offer a conclusion.

IFAD (2010) define the procurement process as "the entire procurement cycle starting from the identification of need through to the completion of the contract". Bailey et al (1994) further refer to procurement as the activities surrounding the provision of materials and services to an organization while maintaining beneficial relationships with the existing supplier market while exploring other alternatives with the aim of gaining value for money. In forming and maintaining these key relationships, construction procurement seeks to address the client's needs with regards to project's structuring and management through the selection of an appropriate procurement method or type which should comprise of; 'a management structure that may involve in-house personnel, an expert advisor from an accredited agency or the private sector (whose role is to manage the project) and other service providers, contracting arrangements for design, construction, maintenance or operation activities; and subcontract arrangements' (NSW Government, 2008:2).

Maizon (1996) identify that one of the main reasons for the dismal performance in the construction industry is the use of unsuitable procurement methods for construction projects. The execution of projects is significantly influenced by the procurement process and activities as a whole with aspects such as project costs, execution time and quality being directly affected, therefore choosing a suitable procurement method will aid in realizing the best value for money and ensure effective risk management in procurement, it will furthermore utilize available resources effectively and assess and stabilize key aspect, namely; 'value for money, cash flow rate, timeliness, quality of design, quality of construction' (NSW Government, 2008:2). As mentioned, the main factors evaluated when selecting an appropriate procurement method comprise of time, certainty, quality, flexibility, price, competitive costs, accountability and responsibility, disputes, negotiation and settlement as they are crucial with regards to the start and execution of the project (NEDO, 1985, Skitmore and Marsden, 1988, Love et al, 1998).

The proposed project to be undertaken by Heriot Watt University Dubai Campus is building an auditorium with a variety of features ranging from different types of electronic fittings to funiture and air conditioning. This may pose as a tough challenge, with regards to the implementation of an appropriate procurement strategy to enable the maximum efficiency for the execution of the project as well as realizing the client's needs and priorities, without exceeding the budget and incurring additional costs, maintaining the time frame and ensuring quality. In order to successfully realize these needs, a strategic approach to procurement is crucial as it ensures that all relevant relationships in the supply chain are maintained for the ultimate realization of the client's strategy in addition to ensuring best value for money, time frame and quality standards. In addition to a strategic approach a critical analysis of procurement alternatives and the benefits of adopting these alternative procurement strategies are key in the decision making process and will be discussed in the next section of the report.

Discussion:

Strategic Approach to Procurement, Factors Influencing a Critical Procurement Strategy and how it can be Implemented

For numerous years, purchasing, a term used interchangeably with procurement, had been deemed to be an operational function lacking in any strategic value (Bailey et al, 1994). However, change in the procurement's capacity from that of a traditional administrative and transactional one to strategic alignment, or incorporating strategy, over the years is crucial, as it is has become centered on strategic partnerships in an unpredictable economic environment with skills and knowledge, with the aim of realizing the client's goals (Tassabehji and Moorhouse, 2008). This may be considered as a result of outsourcing as organizations increasingly outsource a large percentage of previously internally controlled operations to reduce the work load and also involve specialized professionals in the project (Van Weele, 2005). Bailey (1994) make reference to the fact that organizations spend massive amounts of money on supplies, materials and services, this in turn calls for a strategic approach to procurement to ensure that there are no additional costs incurred while aiming to achieve the best value for money and competitive prices.

In addition to organizations having a competitive advantage, Van Weele (2005) further list aspects in which a strategic approach to procurement can be to their benefit. These aspects include; reduction of costs with reference to quality, standardization of products, input with regards to product design and innovation, reduction of stock, increase in flexibility and encouraging synergy with regards to procurement (Van Weele, 2005). Chen et al (2004) term procurement as the crucial connection in a functioning supply chain, ensuring communication amongst all key stakeholders, namely the buyer and suppliers, and developing mutual beneficial relationships and is demonstrated by figure 1 below.

Figure 1: Strategic Procurement's Contribution to the Organizations Financial Performance (Chen et al, 2004).

In formulating a strategic procurement approach, identifying the client's need in order to accomplish the projects objectives is crucial. The need to realize the construction project objectives is a phrase used interchangeably with the client's primary strategy and is illustrated by figure 2 below, whereby achieving the client's primary strategy is considered as crucial in the construction procurement process (Kelly, 2004).

Figure 2: Relationship of the Construction Project to the Client's Business (Kelly, 2004).

NZTA (2008) emphasize that the formulation of a strategic approach in procurement of required materials or services ensures that the best value for money is achieved and because a strategy is a long term goal, this approach enables the organisation to retain competitive and efficient supply markets. Moreover these goals can be considered by the organization in a structured and practical manner, particularly when selecting the most suitable procurement method for a certain procurement activity, with the aim of achieving best value for money while considering all risks involved and mitigating them. Amalgamating an array of activities into a 'mega-contract' may for example; result in increased services at lower costs for the stipulated activities but nonetheless may prevent smaller suppliers from engaging and result in a lowered competition in the supplier market. In this case, Heriot Watt University Dubai Campus must consider such factors when developing a procurement strategy to ensure that they understand the long-term consequences of decisions and can plan for those consequences in a clear and consistent manner.

As mentioned, a procurement strategy fosters clear communication and supplier improvement as well as assisting in identifying and managing risks (NZTA, 2008).

In selecting a procurement method, various variables must be considered as various factors influence the critical procurement strategy. The selection is mentioned by Clamp et al (2007) as being dependent on the proposed nature and scope of work, risk allocation, responsibility over the design, work coordination and management and price basis for granting the contract. Life cycle costs are referred to by Shields and Young (1991) as aspects that a buyer encounters after purchasing a product and increasing by percentage thereby becoming crucial in decision making surrounding procurement in turn becoming one of the factors influencing the critical procurement strategy.

Critical Analysis of Procurement Alternatives and the Benefits of adopting/Integrating these Alternative Procurement Strategies

There exists several procurement alternatives in the construction project management realm and can be applied in this project's case, however these alternatives are dependent on the context of the project itself, and as mentioned, including the nature, scope of work, design, risk allocation and most importantly cost and should therefore scrutinized carefully before adopted. This section seeks to critically discuss these procurement alternatives. These alternatives include the Traditional system, also known as Lump sum, Design and Build Method, Construction Management, Management Contracting, Private Finance Initiative (PFI), Public-Private Partnership, Framework Contracting and Prime Contracting (Cooke and Williams, 2004) with the commonly used methods as Traditional system, Design and Build Method and management methods which include Construction Management and Management Contracting. This report will critically analyze these three commonly used methods and identify one suitable method using a strategic approach, which can be applied by Heriot Watt University, in the construction of their state of the art auditorium.

The first procurement alternative is one that is conventional and probably the most common and is referred to as the traditional method of procurement. The traditional method, commonly used by small and medium sized construction projects, is one whereby the client consents to the following responsibilities, namely; design, cost control and the administration of the contract while the contractor is accountable for the conducting the operations, thereby separating the design and construction works (Clamp et al, 2007, Cooke and Williams, 2004). The contractor is responsible for materials and labour as well as the subcontractors work and suppliers (Clamp et al, 2007). There are situations whereby the client may choose the sub-contractors to be involved with the contractor and in this case the latter being wholly or partially responsible for their operations and if partially responsible 'a collateral warranty' involving the client and sub-contractor is indispensable (Clamp et al, 2007). The contactor selection mode is either through a competitive tendering process or appointed through prior negotiation based on preferential or estimated data and in other cases tendering using a 'two stage tendering or negotiated tendering' can also be referred to as the 'Accelerated Traditional Method' whereby design and construction can be performed in at the same time to a certain degree, this method in turn allows for an early start on the construction but creates a lowered assurance with regards to cost (Clamp et al, 2007). In addition to this uncertainty, a comprehensive plan, which should be given by the client or planning team to the contractor before the cost estimation, rarely happens in essence, resulting in some incomplete elements and miscommunication, incidences of the contractor carrying out decision making without the clients consent leading to re-works and the client having to pay additional costs for any additional work as a result of faults (Cooke and Williams, 2004).

Rwelamila (2007) refers to the widespread use of the traditional procurement systems as generating a context whereby building and civil engineering construction projects are costly and with significant amount of risks involved as well as time consuming with regards to start dates and delays in addition to disagreements and additional costs incurred, using incidences in the South African construction industry as well as the English Commonwealth Countries (ECC) and both public and private clients.

The design and build method is another procurement alternative used by medium to large projects, whereby it compels the contractor to take up a significant part of the works involved in the project while the client gives a brief of the project (Cooke and Williams, 2004) or involves a consultant to direction on the design prerequisites and costs and may be for the whole design and construction or the development of the design and production information on the basis of a design schematics provided by the consultants appointed by the client (Clamp et al, 2007). Levy (2006:197) make the following inference on the Design and Build method; "…the design-build delivery system appears to be a perfect vehicle by which to pursue sustainable or green building construction".

With regards to the process, a competitive tender or negotiated agreement are used as contractor selection methods, with a contract between on contractor being termed occasionally as a 'Single Design and Build' and where there a couple of contractors, even in the case of a two stage operation, with the one with the most potential moving to the second stage is 'Competitive Design and Build' with the disadvantage of being time consuming but ensuring a more advanced design while increasing assurance on cost and timing (Clamp et al, 2007). 'Novation or consultant switch's a process whereby the client may need the contractor to select some or all of its consultants in parallel to the entering of the design and build contract and necessitates for a tripartite contract between amongst the client, consultant and contractor (Clamp et al, 2007). Furthermore, the client-architect and contractor-architect appointment terms stipulated by the RIBA are modified by the CIC stipulations on the novation and collateral warranties (Clamp et al, 2007). The Design and Build method can further reduce the variation with regards to the management of the project making able to be taken on by a single team which is the design and build contractor (Hashim et al, 2006).

With regards to the Heriot Watt Dubai Campus Auditorium Project, this would be a suitable as it will ensure an advanced design is incorporated as the clients need is an auditorium that is has the state of the art technology fit for conferences, lectures and presentations. As a whole, research performed at the Penn State sponsored by the Construction Industry Institute (CII) ascertained that the design-build delivery system normally provided the best performance with regards to the project (Konchar and Sanvido, 1998). Approximately 90% or more with reference to cost measures are key in the procurement selection process (Beard et al, 2001) and is described as having an elevated design level completion at procurement conclusion in order to simplify the competitive process of selection (Molenaar and Gransberg, 2001). Due to the type of contract involved, there is greater certainty on the cost and timing, in this case, the potential risks are therefore shared amongst the client, that is, Heriot Watt University Dubai Campus, the consultant and the contractor. The figure 3 below depicts a Design and Build procurement criteria which are crucial in informing the strategic procurement approach and can be applied by the University.

Figure 3: Procurement Spectrum (Beard et al, 2001)

Songer and Molenaar (1996) refer to the Design and Build method as a 'viable alternative method', making stipulations that this method resulted in several advantages like savings on costs, innovation with regards to constructions and contractor's technological support , savings on time and quick return on investment. Time is considered as an important factor in the Design and Build method. This method is appropriate for clients in the private sector who desire a fast investment return and in particular for projects of a commercial nature, and due to this the negotiation instead of competitive tendering is preferred (Chan, et al, 2001, Hashim et al, 2006). The time factor is therefore one of in the merits of utilizing the Design and Build method especially if the client terms it at key in their project's strategy and therefore as a large percentage of the design operations can be performed simultaneously. Further time saving is realized by the Design and Build method as it is appropriate for simple to reasonably complex projects due to the design and construction operations being taken upon by a single team (Hashim et al, 2006). A second merit derived from the Design and Build Method is communication, due to the fact that a single team is involved in the Design and Builds processes, direct communication, contractual and authority links are maintained and adhered to thereby reducing bottlenecks and slow decision making. Communication goes in parallel with responsibility, a key factor in this method and therefore a merit for the client. Due to the fact that this method offers a single team, one communication and responsibility link is created whereby the contractor is exclusively responsible for any and all design or construction failures (Hashim et al, 2006). Therefore the client only has a single person to interact and communicate with if the project encounters any complications (Ramus and Birchall, 1996). Price certainty is considered as a merit of the Design and Build method due to the drafting of a comprehensive design, generates the high degree of price certainty thereby ensuring an assured cost and value for money, date of completion and furthermore get a return on their investment (Hashim et al, 2006). Innovation is another merit for the Design and Build method due to the contractor's technological support and is further termed as having a higher degree with regards to design at the end of the procurement process (Molenaar and Gransberg, 2001).

Even with the numerous mentioned merits and advantages of the Design and Build method, there are demerits which however can be mitigated if planned for. The Design and Build method operates on a time and cost advantage at the expense of quality. Coller (1982) refers to quality in construction operations being stipulated in the technical specifications of contract. The quality level is put under risk as a result of the use of a single unit in the entire construction process thereby affecting the quality level to some extent a the client seeks value for money (Hashim et al, 2006). However, the quality level can be scrutinized during the construction process to in the least ensure quality is not wholly compromised as well as the client investing more with regards to quality (Hashim et al, 2006)

The third alternative involves procurement utilizing methods of management. The management methods that are popular in construction projects include management contracts (management contracting) and construction management (Clamp et al, 2007, Cooke and Williams, 2004). With regards to management contracting, also seen as an amalgam between the traditional method and construction management (Cooke and Williams, 2004), the client normally starts selecting consultant to formulate the drawings for the project as well as the necessary specifications and is appointed after a tendering process and is compensated based on the services organized, prime costs and management fee (Clamp et al, 2007). The responsibility conferred upon management contracting is to manage the carrying out of work and may not be involved in the actual construction work which is executed in packages performed by contractors allotted by the management contractor and in some cases be responsible for the design (Clamp et al, 2007). The contractors involved are directly accountable to the management contractor and are contractually bound and the advantages of this method include its organized methodology and capacity for flexibility thereby ensuring increased pace in functioning and effectiveness (Clamp et al, 2007). In cases where the management contractor is wholly responsible for the design and construction, the framework is occasionally termed as 'Design, Manage and Construct' and is commonly presented as a contractor-led procurement method and can be architect-led as well when the main contractor is absent, the architect may manage small operations under trade contracts (Clamp et al, 2007). The latter does necessitate a high level of specific proficiency and experience in creating and managing functions which numerous architects may lack the know-how (Clamp et al, 2007).

With regards to construction management, contracts or agreements are usually outlined by the client and include a lead designer who is in charge of the whole design, a construction manager who is in charge of the management and organization of work whilst the client is in control of project direction and enlisting into all trade contracts (Clamp et al, 2007). The trade contractors end up being directly and contractually accountable to the client, with the construction manager having less responsibility over time and costs resulting in the client assuming the larger part of the risks involved (Clamp et al, 2007).

As mentioned, the benefits of these alternatives vary and are dependent on the client's project's scope of work as well as their choice with regards to the procurement method they select. It is therefore crucial for the client to consider all the options available while seeking best value for money. Furthermore, integrating the best practices from all methods can be beneficial while seeking to create a system that offers the best all the systems, however may cause complications with regards to structure, clarity and communication. The procurement spectrum in Figure 3 would be an ideal framework to identify the criteria especially when price based, but in general the main factors that influence the decision making are time, cost and quality and should be a basis to start with.

Conclusion

The selection of a procurement method is an overwhelming process because of the varying variables involved in the construction project. Most important factor is the clients need being addressed and usually clients' needs do vary making it increasingly difficult. Criteria used to select the procurement method in namely; the time frame, cost and its certainty, level of quality, competition, accountability and responsibility, risk mitigation, variation and project complexity as well as the client's level of expertise with regards to the procurement method. However, a simplified guideline can be applied with regards to this selection based of project success criteria, namely, time, cost and quality. With regards to the selected method for the auditorium project, that is the Design and Build method, cost and time are significant benefits of this method and are therefore a deciding factor, however there is the issue of compromise on quality, which on the clients part, should be able to be have a risk mitigating plan with regards to addressing the risk of quality. The time factor is a merit of utilizing the Design and Build method. Communication goes in parallel with responsibility and is another merit of the Design and Build method. Lastly, the price certainty, that is, the guarantee on cost of as well as the quick return on investment is a vital merit for the client. This report has critically examined the employing a strategic approach to procurement whilst critically analyzing procurement alternatives with reference to the construction of the proposed new auditorium by Heriot Watt University Dubai Campus and selecting the design and build method as being suitable for this particular project. It started by discussing the strategic approach to procurement whist evaluating the factors that influence the implementation of critical procurement strategies and how these strategies can be implemented. This report further evaluated the suitable procurement practices while analyzing procurement alternatives and the benefits of adopting these alternative procurement strategies using relevant examples. This was with the aim of creating an informed strategic approach to procurement and procurement method or alternative for the proposed construction of a state of the art auditorium by the client, Heriot Watt University Dubai Campus.

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